SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee required)
For the fiscal year ended DECEMBER 31, 1997
[_] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required)
For the transition period from _______ to _________
Commission file number 0-21934
TELEPAD CORPORATION
(Name of Small Business Issuer in Its charter)
Delaware 52-1680936
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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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Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
Class A Common Stock, $0.01 par value ("Common Stock"), Class A Redeemable
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Warrants ("Class A Warrants"), Class B Redeemable Warrants ("Class B
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Warrants"), Class C Redeemable Warrants ("Class C Warrants") and Class D
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Redeemable Warrants ("Class D Warrants").
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(Title of Class)
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 days.
Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this form. [_]
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The issuer's revenues for the fiscal year ended December 31, 1997
were $3,592,577.
The aggregate market value of the Class A Common Stock held by
non-affiliates of the registrant, based upon the closing price of the issuer's
Class A Common Stock as reported by Nasdaq on March 23, 1998, was approximately
$9,200,000.
As of March 23, 1998, the latest practicable date for which such
information is available, there were issued and outstanding the following number
of shares of each of the registrant's classes of Common Stock:
Class of Common Stock Shares Outstanding
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Class A Common Stock 12,065,624 shares, $0.01 par value
Class B Common Stock none
Documents Incorporated by Reference
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The following documents are incorporated by reference herein: None.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BUSINESS
GENERAL
The Company designs, develops and markets mobile computing and
communications systems for customers whose work forces include substantial
numbers of mobile field workers in remote locations ("field force workers"). The
Company's approach is to provide hardware and software products that support an
enterprise's field force workers, connect the field force workers to their home
office, and direct information to the home office staff and back to the workers
in the field. Through this approach, the Company believes that its customers can
significantly enhance profitability and customer service by providing more
effective tools and communications to their field force workers.
FIELD FORCE SOLUTIONS STRATEGY
The Company's value proposition is that its customers can gain
significant competitive advantages through automation of that portion of their
work forces which operate "in the field" outside a traditional office
environment. To that end, the Company endeavors to provide total "Field Force
Solutions" comprised of purpose-built computer hardware and software linked to
the enterprise through wireless communications. Recognizing the need to tailor
such solutions to each individual customer, the Company's "Field Force
Solutions" strategy incorporates consulting and systems integration services.
To implement its "Field Force Solutions" strategy, the Company
developed the TelePad line of computers and peripherals specifically designed
for the unique requirements of field force workers. It also offers its customers
the services of its staff of professional management consultants, engineers, and
application programmers. Furthermore, it supports the integration of its
products with third-party hardware products, software products, and wireless
services. Accordingly, a "Field Force Solution" may be comprised of
off-the-shelf products combined with custom-built or tailored products and
services.
As the "Field Force Solutions" strategy necessarily requires expertise
in the customers' business, the Company focuses on a limited set of industries.
Currently, these are utilities, cable television, transportation, public safety,
and military equipment maintenance.
From 1993 (the time of the Company's initial public offering) through
1996, the Company devoted most of its resources to developing and manufacturing
its TelePad line of computer hardware. Since 1996 the Company has enhanced the
TelePad 3 to remain within the competitive range with respect to technology, but
more emphasis is being placed on applying the Company's knowledge of field force
automation by offering integrated solutions to potential customers. Such
solutions include reselling hardware from manufacturers other than the Company
where appropriate and offering software, systems integration, and services.
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PRODUCTS
The Company's principal products are the TelePad mobile computers. The
Company's original product, the TelePad SL, was introduced in 1993 and produced
through 1996 (although in very limited quantities after 1995). The Company's
current product is the TelePad 3 which entered production in 1995. The Company
also makes various accessories and peripheral devices for the TelePad computers.
Both the TelePad SL and the TelePad 3 are tablet-style battery-powered
portable computers which use pen input and handwriting recognition as a primary
user interface. Both can also be used on the desktop with the addition of
accessory keyboards. They differ primarily in processing power, storage capacity
and ability to support peripheral devices.
The Company contracts with third-party manufacturers for production of
its products. Both the TelePad SL and TelePad 3 were manufactured by
International Business Machines Corporation ("IBM") until early 1996 after which
Sanmina Corporation ("Sanmina") began manufacturing the TelePad 3. See "--
Manufacturing and Supply."
TelePad SL
The first generation TelePad, the TelePad SL, has pen and keyboard
interfaces but no sound capability. It uses Intel's 386-based microprocessor
technology and is equipped with eight megabytes of random access memory ("RAM"),
a wireless digitizer (for pen input), a low-cost hard drive (170-340 megabytes),
a PCMCIA (Personal Computer Manufacturers Card Interface Association) card slot,
and a data/facsimile modem. It includes "ports" for connecting an external
floppy drive, an external video monitor, or devices using industry-standard
serial or parallel interfaces.
Optional accessories for the TelePad SL include a stand-alone floppy
disk drive, a math co-processor that permits more rapid handling of mathematical
functions and calculations, network and communications upgrades, a keyboard that
can be used in addition to on-screen pen input, and a mount for installing the
TelePad SL in a vehicle. The TelePad SL works with most major operating systems,
including IBM's OS/2 and Microsoft's DOS, Windows and Pen for Windows systems.
Production of the TelePad SL began in 1993. Although the 386 SL
microprocessor employed in the TelePad SL was largely superseded after 1994 by
faster, more powerful microprocessors, the Company continued to find customers
for the TelePad SL based on its unique ergonomic design and its ability to be
mounted in a vehicle. Approximately 1,500 TelePad SLs were sold from 1993
through 1996.
TelePad SLs were designed by the Company and manufactured under a
contract with IBM. When production ended, the Company purchased IBM's remaining
inventory of TelePad SL parts. See "-- Manufacturing and Supply." The Company is
using the parts inventory to build TelePad SLs in its own facility (primarily to
fill special orders from previous purchasers of the TelePad SL) and to service
units built by IBM.
The Company believes that the TelePad SL design would be highly
competitive in the future if it could be built with a more powerful motherboard
and sold at a competitive price.
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Company management believes that such an upgrade may be achievable with minimal
research and development costs if an appropriate motherboard can be purchased
from a third-party. Accordingly, it is investigating possible sources for such a
board. However, no decision has yet been reached on a future version of the
TelePad SL.
TelePad 3
The Company began production of its second product, the TelePad 3, in
1995. The TelePad 3 was powered by IBM's Blue Lightning microprocessor (based on
Intel's 486 microprocessor technology) running at 66 Mhz until 1997 when the 486
microprocessor was replaced by a Cyrix 586 microprocessor. It includes a
microphone and speaker as well as a pen interface, a detachable keyboard, a
dual-scan color display and up to 36 MB of internal RAM. The TelePad 3 works
with most major operating systems, including IBM's OS/2 and Microsoft's DOS,
Windows 95, Windows, Windows for Pen, and SCO UNIX systems.
A unique design feature of the TelePad 3 facilitates its adaptation to
a variety of peripheral hardware devices. The back of the tablet has three
docking bays that can accept any device which can be packaged in one of the
Company's three "modular" form factors and connected with an industry-standard
connector. The Company currently makes a variety of such devices including hard
disk drives in various sizes, adapters for PCMCIA cards, which incorporate
memory and communications capabilities in a standard format linking peripheral
devices such as facsimile modems, local area networks, or memory storage to the
pen computer, and a floppy disk drive.
In response to specific customer requests and opportunities pursuant to
the Company's "Field Force Solutions" strategy, the Company has adapted a number
of devices to the modular form factor of the TelePad 3. These include a
full-size CD-ROM module, a Global Positioning System ("GPS") module, a variety
of wireless LAN and other communications modules. The Company has created
conceptual designs for additional modules, but has adopted a policy of not
funding engineering development until customers express firm intent to purchase
such products.
The Company contracted with IBM for substantial portions of the
electrical design of the TelePad 3. The design belongs to the Company, although
it is obligated to pay IBM a royalty of $15 per TelePad 3 computer manufactured
by a third party with a non-IBM microprocessor card for certain IBM-proprietary
design elements incorporated in the TelePad 3.
Production of the TelePad 3 commenced at IBM at the end of June 1995.
After a series of disputes regarding manufacturing quality and business issues,
the Company and IBM agreed in December 1995 that the Company would seek another
contract manufacturer and that IBM would support the transition to the new
manufacturer. The Company then contracted with Sanmina which began TelePad 3
production in June 1996. See "-- Manufacturing and Supply." and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
IBM has informed the Company that it no longer produces the Blue
Lightning microprocessor, which is a proprietary IBM product available only on
microprocessor cards manufactured by IBM. However, IBM agreed to continue to
manufacture such electronic card assemblies for the TelePad 3 until June 30,
1997, subject to certain minimum order restrictions. In 1997, the Company
replaced the Blue Lightning microprocessor with a 586-class 32-bit
microprocessor upgrade for the TelePad 3.
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SERVICES
The Company offers a range of consulting, systems integration,
programming and customer support services focused primarily on field force
automation. The consulting group analyzes requirements, develops system
architectures, and provides a variety of project planning and management
services. The systems integration ("SI") group implements systems combining
various manufacturers' hardware, software, and wired and wireless
communications. SI also collaborates with the Company's hardware engineers on
special purpose devices custom-designed for individual customers.
The Company has a limited number of consulting and SI employees, and
supplements its own staff with subcontractors and temporary employees. The
Company has adopted a policy of not hiring permanent full-time consulting or SI
employees until justified by contracts with customers.
MANUFACTURING AND SUPPLY
The Company does not operate its own manufacturing facility for the
TelePad computers or any other hardware products. Instead, the Company contracts
with outside manufacturers. IBM was the Company's sole manufacturer of TelePad
products from 1993 through late 1995. Sanmina is currently the Company's sole
manufacturer of finished products.
The components of the TelePad computers, such as the plastic casing,
are supplied by various outside sources. In most instances, these suppliers were
selected by TelePad although the actual purchasing of components for TelePad
production is done by Sanmina. The Company believes that both the Company and
Sanmina have good relationships with current suppliers. While the Company
believes that alternative sources of supply generally are available at
competitive prices, certain of the components are highly technical in nature
and, with respect to such components there can be no assurance that the Company
would be able to locate, on a timely basis or at all, alternative sources of
supply.
The Company's software applications packages are written or modified
specifically to address each customer's needs. Types of software developed by
the Company include checklist generators and editors, checklist managers, report
generators and transaction processing systems. The Company has adopted a policy
of not funding software development until customers express firm intent to
purchase such software.
The Company has licensed certain Microsoft Corporation ("Microsoft")
products permitting the Company, in exchange for paying associated license fees
to Microsoft or by purchasing the products from an authorized Microsoft
distributor, to install such products on computers produced by the Company. The
Company purchases DOS, Windows, Windows 95 and Windows 95 Pen Services software
from an authorized distributor. The Company also has entered into a licensing
agreement with IBM to license and install IBM's OS/2 operating system on the
TelePad computers. There is no minimum royalty required under the Microsoft or
IBM license agreements.
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IBM
IBM was the Company's sole contract manufacturer for the TelePad SL
(produced from 1993 through 1995) and for the first 400 units of the TelePad 3
(in 1995). Throughout its relationship with IBM, the Company experienced
manufacturing defects which caused interruptions in production while the defects
were corrected. The Company and IBM also had a number of disagreements on
business issues. These problems caused the Company and IBM to agree to end their
manufacturing relationship in 1996.
From 1993 through 1996, the Company and IBM entered into various
contractual arrangements regarding design and production of the TelePad
computers. The original IBM Agreement provided for production of the TelePad SL.
In March 1994, the Company and IBM amended the IBM Agreement to include IBM's
services for the electrical and physical design, development and testing of the
internal circuitry and software for the TelePad 3. In June 1994, the Company and
IBM further amended the agreement to incorporate IBM's services for
manufacturing the TelePad 3.
The IBM Agreement was further modified by the parties in February 1995
to resolve certain disputed issues. Under the February 1995 amendment, the
Company agreed to release IBM, its agents, directors, officers, employees,
representatives, successors and assigns from all rights, claims demands, actions
and liabilities (collectively, "Claims") the Company ever had, has or may have
against IBM arising out of or resulting from the IBM Agreement. IBM agreed to
accept the return of approximately $943,000 of inventory components previously
invoiced to the Company in December 1994 and to reduce the product royalty
payment due to IBM for each TelePad 3 manufactured by a third party with a
non-IBM microprocessor to $15.00 per unit.
On January 25, 1996, IBM and the Company entered into the IBM
Resolution Agreement to facilitate transition of TelePad 3 manufacturing to a
new manufacturer, to address certain design issues relating to the TelePad 3, to
reschedule payments due IBM and to provide for purchase, by the Company, of
IBM's remaining inventory of TelePad SL components. The IBM Resolution Agreement
also settled all previously disputed financial matters remaining between the
companies.
Sanmina
The Company moved production of the TelePad 3 to Sanmina in a two-stage
process during the first half of 1996. The Company entered into a Letter of
Intent with Sanmina and, as of the date hereof, has negotiated but not signed a
definitive agreement with Sanmina. The Company believes its relationship with
Sanmina is good and that the unresolved contract issues are administrative in
nature and will be resolved in the near future. There can be no assurance,
however, as to when, if ever, the Company will enter into acceptable contractual
arrangements with Sanmina. The Company is not currently in discussion with any
alternative manufacturer.
TelePad 3 production commenced at Sanmina in June 1996. Approximately
1,510 units were built by Sanmina from June 1996 through December 1997.
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Assembly and Testing
The Company has historically purchased standard configurations of
TelePad 3 computers form its contract manufacturers. In 1997, the Company placed
more emphasis on offering customers non-standard configurations. This resulted
in a mismatch with the standard configurations being purchased under outstanding
purchase orders with Sanmina, the Company's contract manufacturer. In order to
improve the match between configurations purchased and configurations requested
by customers and to minimize the results of forecasting errors caused by long
lead times of component parts, the Company is shifting the assembly and test
functions from Sanmina to its Herndon facilities. This transition is expected to
provide more flexibility and to increase cost effectiveness in producing the
specific configurations requested by customers and to minimize costs incurred
when forecasted production runs do not match changing customer requirements.
DISTRIBUTION, WARRANTY AND SERVICE
The Company distributes its products directly to customers and through
resellers.
The Company warrants that each TelePad computer (excluding software
obtained from and warranted by third parties) is free from defects in material
and workmanship for one year from the date of delivery and acceptance. The
Company also offers selected customers extended warranties for an additional
charge. The Company handles all warranty claims of its customers, and relies on
its warranty from Sanmina to protect it from defects in manufacturing.
The Company's policy is to establish warranty reserves based upon sales
volume and experience to date. Warranty expense is recognized as incurred.
RESEARCH AND DEVELOPMENT
The Company's research and development ("R&D") activities involve
engineering design and production support for two types of products: (1)
existing products; and, (2) future products.
Existing products require continuing R&D support as a consequence of
the rapid evolution of computer technology. For example, the manufacturers of
components used in the TelePad computers frequently upgrade their components or
embedded software ("firmware"). Many upgrades require other modifications in the
production design. Changes which may effect radio frequency emissions require
re-certification for compliance with United States and European Union
regulations. Accordingly, the Company must devote a portion of its R&D resources
to its existing products.
R&D for future products is subject to available financial resources. To
the extent permitted and based on the anticipated profitability of new products,
the Company intends to maintain an active R&D program. The Company intends when
possible to minimize R&D cost and risk by purchasing or licensing existing
designs or design elements rather than creating completely original designs.
Completion of any design for production is dependent upon development of the
market for these products which would make production profitable. See
"Products." There can be no assurance that the Company will be successful in
developing any new products or upgrades to its TelePad products.
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The Company has a limited number of R&D employees. It contracts with
other engineering firms and consultants to support R&D activities which are
beyond the capacity of its in-house staff. The Company intends to employ
additional engineering and customer support personnel as its financial condition
permits and its business requires. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
SALES AND MARKETING
The Company's sales and marketing activities currently are conducted
internationally by four sales representatives, each covering a defined segment
of the market. The Company also employs commissioned sales agents to market its
products. Additionally, the Company expects to add additional sales and
marketing personnel as the Company's financial condition permits and its
business requires.
The Company believes that the immediate market for its products lies
with large corporations and public entities that are heavily dependent on
information resources and that utilize dispersed and highly mobile workforces.
Specifically, the Company has focused on utilities, cable television,
transportation, public safety, and military equipment maintenance as the markets
presenting the greatest opportunity for the Company at present. The Company's
strategy is to reach the customers in these markets through its own sales force
supplemented by the sales activities of value added resellers ("VARs").
The Company's public relations efforts focus on its targeted markets.
The Company is seeking exposure through support of its value-added resellers at
shows and conventions at which such resellers exhibit. In addition, the Company
expects to engage in selective advertising of its products and to seek
additional exposure through targeted technical journals and popular computing
media.
During 1997, three customers accounted for approximately 52% of the
Company's total revenues. Three customers accounted for approximately 53% of
total revenue during 1996.
PATENTS AND PROPRIETARY RIGHTS
The Company holds four patents with respect to the multi-purpose handle
and adjustable, locking handle mechanism used on the TelePad computers. These
patents provide expanded coverage over the handle and the four positions the
computer can have, as well as the push button release mechanism used in the
TelePad SL. In addition, the Company's patent application for the industrial and
mechanical design of the portable electronic platform which is the basis of the
TelePad 3 has been allowed and the patent should be issued in the immediate
future.
The Company has received a Notice of Allowance from the U.S. Patent and
Trademark Office for its trademark application relating to the use of the name
"TelePad" with respect to certain communications and computer equipment
described in the application, and intends to file an application to register its
new logo.
Other than as described above, the Company currently does not have or
intend to seek patents relating to its products, because it does not believe
that the technology it employs is patentable.
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It is the Company's practice to protect its proprietary materials and
processes by relying on trade secret laws and non-disclosure and confidentiality
agreements. There can be no assurance that confidentiality or trade secrets will
be maintained or that others will not independently develop or obtain access to
such materials or processes.
EMPLOYEES
At March 14, 1998, the Company had a total of 29 full-time employees,
consisting of 3 engineers, 6 employees in the consulting practice, 10 finance
and administrative personnel, 6 employees in customer and technical support, and
4 sales and marketing personnel. From time to time the Company employs part time
employees and had two part-time employees as of the date of this report. No
employee is currently represented by a labor union. The Company has never
experienced a work stoppage or interruption due to a labor dispute. Management
believes that its relations with its employees are good.
GOVERNMENT REGULATION
The TelePad 3 and the TelePad SL are subject to government regulation
of electromagnetic emissions that are conducted from the devices over power
lines, when the devices are operated from AC wiring, and radiated through the
air. In particular, the regulations of the Federal Communications Commission
("FCC") require products of this kind to have been approved by the FCC as
meeting the Class B digital device requirements under Parts 2 and 15 of the FCC
rules before the products may be marketed (i.e., imported, sold or leased or
advertised for sale or lease). These regulations are designed to minimize
interference with certain other electronic products and communications services.
FCC approvals (a form of equipment authorization known as
"certification") are granted only after the products have passed various
electromagnetic compatibility tests and an application submitted to the FCC has
been granted. The FCC approves equipment of the kind produced by the Company
only on the condition that operation of the equipment not cause interference to
licensed radio communications and that the equipment accept interference from
licensed radio facilities, even if the interference results in undesirable
operation of the equipment. Modems that the Company sells for the connection of
the TelePad SL and the TelePad 3 to the public switched telephone line are
subject to certification under the FCC Rules in the same manner and subject to
an additional approval requirement of "registration" under Part 68 of the FCC
Rules governing certain telephone equipment.
Although the TelePad 3 and TelePad SL have received FCC certification,
the devices must continue to comply with federal regulations. Changes in the
design of the products generally will require the Company to have the products
reexamined as to continued compliance. Depending on the nature of the change,
the products may be subject to the receipt of new or modified approvals before
the changed products may be marketed. Generally speaking, such recertification
focuses on the modification and is not as time-consuming or expensive as the
original certification processes.
The Company also must ensure that the TelePad 3 and TelePad SL comply
with the OSHA regulations requiring electrical equipment to have been approved
for safety by a nationally recognized testing laboratory. Safety approvals for
the TelePad SL and the TelePad 3 have been obtained. Changes in either device
may require retesting and further approvals, which could result in delay that
could have a material adverse effect on the Company.
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To the extent that the Company desires to sell its products
internationally, it also will be required to comply with the regulations of
other nations as to electrical emissions and safety, some of which may be
expected to be more stringent than those imposed by the FCC or under regulations
adopted by OSHA. In particular, the TelePad 3 currently is certified for sale
within the European Union (the "EU"), whose standards are more stringent, in
order to permit export to members of the EU, including the United Kingdom.
To the extent that the Company sells products, directly or indirectly,
to the United States Government, the Company's contracts and subcontracts will
be subject to termination, reduction or modification at the Government's
convenience.
Failure to comply with FCC, OSHA and other governmental regulations
would have a material adverse effect on the Company. The delay associated with
obtaining any future approvals may also have a material adverse effect on the
Company.
COMPETITION
The computing industry is characterized by intense competition and
rapidly changing technology and is becoming increasingly competitive. The
Company believes that it distinguishes itself in this competitive environment by
offering unique products combined with consulting and systems integration
services specifically focused on mobile workers. See "-- Field Force Solutions
Strategy." However, numerous other companies, including companies with greater
resources and experience than the Company, also are engaged in developing
products and services which could be competitive with those developed by the
Company. Therefore, there can be no assurance that the strategy of the Company
will succeed.
The Company's competitors or future competitors include, or can be
expected to include, IBM, Fujitsu Limited, Toshiba Corp., NEC Technologies,
Inc., Zenith Data Systems Corp., Symbol, Telxon, Motorola, Samsung, Ricoh and
others. In addition, the Company expects that other competitors will emerge and
competing products will be introduced in the near future. No assurance can be
given that the Company will be able to successfully compete against current and
future competitors or products or that competitive pressures faced by the
Company will not adversely affect its financial performance.
STOCK PURCHASE AGREEMENT
On January 29, 1998 the Company executed a letter of intent with L&E
Mobile Computer Mounts, Inc. ("L&E") pursuant to which the Company agreed in
principle to acquire all of L&E's outstanding capital stock on or before March
31, 1998 for a purchase price of $2 million, plus an earn-out based on L&E's
post-closing performance and an aggregate $1 million additional investment over
the next three years. The consummation of the transaction is subject to several
conditions, including the execution of definitive agreements and the Company
obtaining the requisite financing. L&E is a hardware integrator of
vehicle-mounted communications equipment, with a significant presence in the
public utility sector. There can be no assurance that the conditions to
consummation of the transaction will be satisfied.
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ITEM 2. DESCRIPTION OF PROPERTY.
PROPERTIES
The Company's offices are located at 380 Herndon Parkway, Suite 1900,
Herndon, Virginia 20170. The Company leases, until June 30, 1999, approximately
19,155 square feet of office space on a single floor of an office building. The
lease provides for a monthly rental of $13,231, plus designated operating
expenses, and provides the Company with certain concessions regarding rent
abatement and tenant build-out allowances. The rent will increase on an annual
basis for the duration of the lease. The Company has installed leasehold
improvements for purposes of demonstrating its products and strategy to
customers and prospective customers. The Company believes that, in the event
additional space is required and cannot be leased on acceptable terms from its
current lessor, suitable alternative facilities exist in the local area at
comparable rental rates.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently involved in any legal proceedings, but
has from time to time in the past been involved in routine litigation incidental
to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of March 23, 1998, the Company had approximately 100 holders of
record and approximately 2,000 beneficial holders of its Class A Common Stock
and no holder of its Class B Common Stock. The Company's Class A Common Stock
trades on the Nasdaq SmallCap Market tier of The Nasdaq Stock Market under the
symbol: TPADA.
On July 15, 1993, the Company's Registration Statement on Form SB-2
filed under the Securities Act of 1993 became effective and the Company became a
"reporting company" subject to the periodic reporting and other requirements
under the Securities Exchange Act of 1934. From July 16, 1993 until June 7, 1995
the Company's Class A Common Stock was traded on The Nasdaq SmallCap Market. The
Company's Class A Common Stock resumed trading on The Nasdaq SmallCap Market on
March 29, 1996. The high ask and low bid prices for the Class A Common Stock are
as reported by the National Quotation Bureau, Inc. for the period January, 1996
through March 28, 1996, and by Nasdaq from March 29, 1996 through December 31,
1996 and are indicated below. Such prices are interdealer prices without
markups, markdowns or commissions, and may not necessarily represent actual
transactions.
1997 1996
Sales Price High Low
Quarter Ended High Low Ask Bid
March 31 $ 5.125 $ 1.625 $ 5.000 $ 0.750
June 30 $ 2.750 $ 1.000 $ 5.000 $ 3.188
September 30 $ 2.063 $ 1.000 $ 5.250 $ 4.031
December 31 $ 1.375 $ 0.313 $ 5.375 $ 4.000
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 February 24, 1998, the directors of the Company adopted
resolutions proposing to recommend to the Company's stockholders that the
stockholders authorize an Amendment to the Company's Certificate of
Incorporation to effect a 1 for 10 reverse stock split of the Company's issued
shares of Common Stock (the "Reverse Split"). If the Reverse Split is authorized
by the stockholders at the annual meeting of stockholders scheduled on May 4,
1998, management expects that the share price of the Company's Class A Common
Stock will trade above the one dollar maintenance price level, however, there
can be no assurance as to the approval of the Reverse Split by the Company's
stockholders or, if the Reverse Split is approved, the effect on the market
price of the Class A Common Stock.
The Company has never paid a cash dividend on its shares and does not
presently anticipate doing so in the foreseeable future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS
TelePad products revenue increased approximately 66% in the year ended
December 31, 1997 over 1996, primarily as a result of an increased volume of
TelePad 3 computer sales. Although the Company has developed and currently
offers the TelePad 3 computer with a 586 microprocessor, with characteristics
such as ruggedness and flexibility that make it well suited for its intended
market, customer perceptions relative to the 486 microprocessor in the
predecessor TelePad 3 versus Pentium based laptops and the respective relative
pricing have had a negative affect on sales.
The Company continues to enhance the TelePad 3 to remain within the
competitive range with respect to technology, but more emphasis is being placed
on applying the Company's knowledge of field force automation by offering total
integrated solutions to potential customers. Such solutions include reselling
hardware from manufacturers other than the Company's and offering software,
systems integration, and services.
The gross margins from TelePad products sold in 1997 and 1996 continued
to be constrained by the relatively high cost of parts purchased by the prior
manufacturer, but not used earlier due to financial and technical delays, and by
competitive pricing pressure. The cost of TelePad products includes a charge of
$805,000 to recognize an erosion in inventory value caused by this pricing
pressure and product obsolescence caused by the rapid introduction of more cost
effective technology. The cost of TelePad products also includes a charge of
$156,000 to recognize the cost of replacing TelePad 3 batteries in inventory
that have failed to meet product specifications and $37,000 to write off excess
486 microprocessors resulting from the shift to the 586 microprocessor.
Commensurate with the write down of inventory, a reserve of $654,000 was
established in 1997 to recognize the loss of inventory value and obsolete parts
for which the Company has purchase obligations outstanding with Sanmina.
The cost of TelePad products sold in 1996 includes a $47,000 charge to
expense accessories for the TelePad 3 which were made obsolete by design
modifications. Cost of products sold also includes $23,000 for warranty costs to
incorporate recent engineering changes into TelePad 3 units built in prior
periods and approximately $94,000 for costs related to replacing batteries that
failed to meet product standards after a component change.
Revenue from service contracts increased 10% in 1997 over 1996. The
increase in service contract revenue in 1997 is primarily the result of an
increase in consulting services to the wireless communications market. The
Company's stated objective is to shift its business strategy from a primary
concentration on TelePad computer hardware to a strategy of broadening the
services offered to include the delivery of total integrated solutions. The
primary target market is workforce administration and field service dispatch and
the solutions include mobile client hardware, software, systems integration, and
other services.
Research and development expenses declined $573,000 in 1997 from 1996
expenditures of $1,516,000. This 38% decrease in R&D spending was due primarily
to a shift from design and development work to enhance the TelePad 3 and
non-recurring expenses associated with the start up of a new manufacturing
facility in 1996 to the development of the 586 microprocessor and work on
TelePad 3 modules in 1997.
14
<PAGE>
Selling, general and administrative expenses in 1997 were $4,407,000
compared to $4,352,000 for the same period in 1996. Although aggregate selling,
general and administrative expenses were approximately the same in 1997 and
1996, there was more emphasis on sales in 1997, but the increased selling
expenses were generally offset by lower administrative expenses.
Interest income declined by $232,000 from 1996 as short-term
investments were reduced.
Interest expense of $253,000 and amortization of debt issue costs of
$118,000 in 1996 relate to the $4,000,000 in bridge notes and the $750,000
Promissory Note (as defined below). These notes were retired with the proceeds
from the Unit Offering.
The weighted average number of shares outstanding increased primarily
as a result of 6,555,000 shares sold in the Unit Offering in April 1996.
The Company is monitoring and considering possible implications of the
year 2000 problem, but to date has not encountered any issues that would have a
material adverse effect on the operations or financial condition of the Company.
LIQUIDITY AND CAPITAL RESOURCES
In the year ended December 31, 1997, net cash used in operating
activities was $3,575,000, primarily due to the net loss incurred in 1997.
Accounts receivable increased by $787,000 in the current period based on the
combination of increased sales and extended payment terms on one significant
sale. Inventory reductions, due primarily to sales in the period, contributed
$1,479,000 to cash. Advance payments to Sanmina in the current period increased
$1,286,000, primarily as a result of advance payments made to the Company's
contract manufacturer (Sanmina) against open purchase orders for inventory. The
advance payments were made because the original TelePad 3 product delivery
schedule was significantly delayed by the 586 microprocessor development
schedule. The advance payments were funded by a $2,000,000 letter of credit
previously issued to Sanmina to facilitate production. The remaining balance on
the letter of credit was returned to cash at its expiration.
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.
At December 31, 1997, the Company had approximately $1,900,000 in
outstanding purchase orders issued to Sanmina. The outstanding purchase orders
consist primarily of kits of TelePad 3 computers which will be assembled and
tested at the Company's facility in Herndon, Virginia. Approximately $1,286,000
of the $1,900,000 commitment will be funded from advance payments made to
Sanmina in 1997. Because the specific configurations of the TelePad 3 computer
included in this outstanding commitment are nearing the end of a product cycle,
the Company reserved $654,000 in 1997 to recognize the loss of value and
obsolete parts on the outstanding purchase orders.
15
<PAGE>
On January 29, 1998 the Company executed a letter of intent with L&E
Mobile Computer Mounts, Inc. ("L&E") pursuant to which the Company agreed in
principle to acquire all of L&E's outstanding capital stock on or before March
31, 1998 for a purchase price of $2 million, plus an earn-out based on L&E's
post-closing performance and an aggregate $1 million additional investment over
the next three years. The consummation of the transaction is subject to several
conditions, including the execution of definitive agreements and the Company
obtaining the requisite financing. L&E is a hardware integrator of
vehicle-mounted communications equipment, with a significant presence in the
public utility sector. The Company is seeking additional financing to consummate
this transaction, but there can be no assurance as to the availability or terms
of any required additional financing.
The Company believes its existing capital resources, consisting
primarily of cash, short-term investments and funds from operations will provide
sufficient capital for at least the next 12 months. This belief is dependent
upon the TelePad 3 computer being competitive in the market and the Company's
ability to sell the existing TelePad 3 inventory and inventory resulting from
purchase commitments, 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 has no established banking relationships and
no available line of credit or other 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.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
A number of statements contained in this report are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 that involve risks and uncertainties that could cause actual results to
differ materially from those expressed or implied in the applicable statements.
Such statements include, but are 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.
ITEM 7. FINANCIAL STATEMENTS.
The required financial statements are included in a separate section
following the signature page as an addendum to this Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
16
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a ) OF THE EXCHANGE ACT.
The directors and executive officers of the Company are as follows:
Name Age Positions with the Company
- ------------------- ----- -------------------------------------------------
Donald W. Barrett 51 Chairman of the Board of Directors and
Chief Executive Officer
Ronald C. Oklewicz 51 President, Chief Operating Officer, and Director
John P. Diesel 71 Director
Sydney H. Dankman 80 Director
Alan B. Salisbury 61 Director
E. Donald Shapiro 66 Director
John M. Toups 72 Director
Robert D. Russell 58 Vice President, Secretary, Treasurer and
Chief Financial Officer
- ----------------------
DONALD W. BARRETT became Chief Executive Officer of the Company and
Chairman of its Board of Directors on April 16, 1996. From July 1991 through
March 1996, Mr. Barrett was president and chief executive officer of Ideas, Inc.
which owned and operated a family of telecommunications and information systems
companies. Mr. Barrett was president of the Government Systems Group of Contel
Federal Systems, Inc., a network integrator, from 1987 through 1991 and
president of the Custom Products Group of Burroughs Corporation, a computer
manufacturer, from 1984 through 1987. Prior to that time, Mr. Barrett held
various marketing and technical positions with GTE and General Dynamics. Mr.
Barrett is a director of Objective Communications, Inc.
RONALD C. OKLEWICZ has been President, Chief Executive Officer and a
Director of the Company since August 1992. Mr. Oklewicz was Chief Executive
Officer from August 1992 until April 16, 1996. From November 1991 until August
1992, Mr. Oklewicz served as a consultant to the Company. Mr. Oklewicz served in
an executive capacity at Wollongong Group, a software communications firm, from
1990 through 1991. Mr. Oklewicz served in various positions at Apple Computer
from 1986 through 1990, including serving as general manager of the Federal
System Division. Mr. Oklewicz also spent 13 years with Xerox Corporation in
various sales and marketing positions.
JOHN P. DIESEL has been a Director of the Company since June 27, 1995.
Mr. Diesel was Chairman of the Board of Directors from July 1995 until April 16,
1996. Mr. Diesel, who has been retired since 1991, was formerly the president of
Tenneco Inc. from 1979 until 1991. Mr. Diesel currently is a director of
Aluminum Corporation of America and Brunswick Corporation.
17
<PAGE>
SYDNEY H. DANKMAN has been a Director of the Company since June 1990.
Mr. Dankman, who has been retired for a period in excess of five years, is an
investor in early development technology ventures.
ALAN B. SALISBURY has been a Director of the Company since July 1996.
Mr. Salisbury has been a director and the president of Learning Tree
International Inc. since April 1993 and has been a director of Sybase, Inc. and
Template Software. Mr. Salisbury served as Executive Vice President and Chief
Operating Officer of Microelectronics & Computer Technology Corporation from May
1991 to April 1993.
E. DONALD SHAPIRO has been the Joseph Solomon Distinguished Professor
of Law at New York Law School since 1983 where he served as both Dean and
Professor of Law from 1973 to 1983. He is Supernumerary Fellow of St. Cross
College at Oxford University, England and Visiting Distinguished Professor
Bar-Ilan University, Tel-Aviv, Israel. Mr. Shapiro received a J.D. degree at
Harvard Law School and has been conferred honorary degrees by both Oxford
University and New York Law School. He currently serves on the Boards of
Directors for several public companies including Loral Space and Communications
Corporation, Eyecare Products PLC, Kranzco Realty Trust, Premier Laser Systems,
Cafe USA, United Industrial Corporation, Vasomedical, Inc., Vion, Inc., and Bank
Leumi Trust Company. Mr. Shapiro is a Fellow, Institute of Judicial
Administration, NY, and American Academy of Forensic Sciences and a life member
of the American Law Institute. He is author or co-author of more than 50
publications including books and journal articles dealing with Medicine,
Forensic Science and the law.
JOHN M. TOUPS has been a Director of the Company since April 1995. Mr.
Toups, who has been retired since 1987, was the president and chief executive
officer of Planning Research Corporation from 1978 until 1987. Mr. Toups
currently serves on the board of NVR, Inc., CACI International, Thermatrix,
Inc., Halifax Corporation and Government Technology Services, Inc.
ROBERT D. RUSSELL has been Vice President, Treasurer and Chief
Financial Officer of the Company since May 1995 and Secretary of the Company
since September 1996. Prior to joining the Company, Mr. Russell was Vice
President, Finance and Administration, Secretary and Treasurer of Falcon
Microsystems, Inc. from 1986 until 1994 and an independent consultant from
August 1994 until May 1995.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, (The
"Exchange Act") requires the Company's executive officer and directors, and
persons who beneficially own more than 10% of the Company's Common Stock, to
file initial reports of ownership and reports of changes of ownership with the
Securities and Exchange Commission and furnish copies of those reports to the
Company. Based solely on a review of the copies of the reports furnished to the
Company to date, or written representations that no reports were required, the
Company believes that all reports required to be filed by such persons with
respect to the Company's fiscal year ending December 31, 1997 were timely made,
except for certain reports filed by Messrs. Dankman, Shapiro and Toups.
18
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following sets forth the compensation paid by the Company during
the three fiscal years ended December 31, 1997 to its Chief Executive Officer
and Chief Operating Officers (the "Named Officers"). No other executive officer
of the Company received compensation in excess of $100,000 for the fiscal year
ended December 31, 1997.
SUMMARY COMPENSATION TABLE
Long-term
Compensation
Annual Compensation Awards
---------------------------- ------------
Other Annual
Salary Compensation Options
Name and Principal Position Year ($) ($) (#)
--------------------------- ---- -------- ------------ ------------
Donald W. Barrett (1) 1997 $250,000 $ 0 125,000(3)
Chief Executive Officer 1996 $177,083 $ 0 400,000(4)
Ronald C. Oklewicz (2) 1997 $150,000 $ 0 60,000(5)
President and Chief 1996 $150,000 $35,000
Operating Officer 1995 $123,885 $ 0 200,000(6)
- -------------------
(1) Mr. Barrett became the Company's Chief Executive Officer on April 16, 1996.
(2) Mr. Oklewicz was the Company's Chief Executive Officer from August 5, 1992
until April 16, 1996 .
(3) Represents options to purchase shares of Class A Common Stock at an
exercise price of $0.376 per share (the average of the closing highest and
lowest sales prices of the Common Stock on the date of grant), with such
options becoming exercisable on December 2, 2003.
(4) Represents options to purchase shares of Class A Common Stock at an
exercise price of $3.8125 per share (the average of the closing bid and
asked prices of the Common Stock on the date of grant), with 200,000 of
such options being currently exercisable and 200,000 options becoming
exercisable on December 31, 1998.
19
<PAGE>
(5) Represents options to purchase shares of Class A Common Stock at an
exercise price of $0.376 per share (the average of the closing highest and
lowest sales prices of the Common Stock on the date of grant), with such
options becoming exercisable on December 2, 2003.
(6) Represents options to purchase shares of Class A Common Stock at an
exercise price of $1.75 per share (the average of the closing bid and asked
prices of the Common Stock on the date of grant).
Option Grants in Last Fiscal Year
Shown below is information concerning stock option grants of Class A
Common Stock awarded to the Named Officers during the Company's 1997 fiscal
year.
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
Name Number of Shares % of Total Options Exercise or Expiration
Underlying Options Granted to Employees Base Price Date
Granted (1) in Fiscal 1997 ($/sh) (2)
- ------------------ ------------------ -------------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Donald W. Barrett 125,000 33.9% $0.376 12/02/07
Ronald C. Oklewicz 60,000 16.3% $0.376 12/02/07
</TABLE>
- -------------------
(1) The options are incentive stock options.
(2) The exercise price is equal to the fair market value of the shares of Class
A Common Stock on the date of grant of the option.
Aggregated Option Exercises In Last Fiscal Year And Fiscal Year-End
Option Values
The following table sets forth, for the Named Officers of the Company,
information regarding aggregate exercises of options in 1997 and the number and
value of unexercised options at December 31, 1997:
<TABLE>
<CAPTION>
Name Number of Value Number of Shares Value of
Shares Realized Underlying Unexercised Unexercised
Acquired on Options at End of In-the-Money
Exercise Fiscal Year Options at End of
Exercisable/ Fiscal 1997
Unexercisable Exercisable/
Unexercisable (1)
- ------------------ ----------- -------- ---------------------- -----------------
<S> <C> <C> <C> <C> <C>
Donald W. Barrett 0 0 200,000/325,000 $0/$7,750
Ronald C. Oklewicz 0 0 380,000/60,000 $9,720/$3,720
</TABLE>
- ------------------
20
<PAGE>
(1) Based upon the difference between the exercise prices of the options and
the closing price of the Class A Common Stock, as reported on the The
Nasdaq SmallCap Market on December 31, 1997, of $0.438 per share.
Employment Contracts and Termination of Employment and
Change-in-Control Arrangements
The Company has entered into an employment agreement with Donald W.
Barrett, dated as of April 10, 1996. The employment is "at-will" and may be
terminated by either party at any time, subject only to the terms of the
employment agreement and the By-Laws of the Company. Pursuant to the agreement,
Mr. Barrett serves as Chairman of the Board and Chief Executive Officer of the
Company at a salary of $250,000 per annum. Mr. Barrett's salary has been reduced
by $22,500 commencing January 1, 1998 in consideration for an award of 45,000
shares of Class A Common Stock. The agreement provides that Mr. Barrett is
entitled to receive specified bonuses in the aggregate amount of $220,000 upon
the occurrence of specified events and achievement of specified sales and
financial milestones by the Company, as well as other supplemental benefits at
the discretion of the Board of Directors. In addition, options to purchase
396,500 shares of Class A Common Stock pursuant to Company's Amended and
Restated 1993 Stock Option Plan as amended (the "SOP"), and options to purchase
3,500 shares of Class A Common Stock under the 1996 Stock Incentive Plan, all at
an exercise price of $3.8125 per share, were granted to Mr. Barrett pursuant to
such agreement. 100,000 of such options are immediately exercisable, 100,000
options become exercisable on December 31, 1997, and 200,000 of such options
shall become exercisable on December 31, 1998, subject to certain acceleration
provisions, including the occurrence of a change in control of the Company or
the termination of Mr. Barrett other than for cause or disability (as such terms
are defined in Mr. Barrett's employment agreement). The agreement also provides
that if Mr. Barrett is terminated other than for cause or disability, the
Company will pay to Mr. Barrett his compensation for 12 months following such
termination. During the term of employment and for a period of one year after
such employment has terminated, the agreement provides that Mr. Barrett will not
solicit the Company's employees.
The Company has entered into an employment agreement with Ronald C.
Oklewicz, dated as of January 1, 1998, for a term ending December 31, 1998.
Pursuant to the agreement, Mr. Oklewicz serves as President and Chief Operating
Officer of the Company at a salary of $130,000 per annum. The agreement provides
that Mr. Oklewicz is entitled to receive 40,000 shares of Class A Common Stock
in 1998 and a bonus upon the occurrence of specified events and achievement of
specified sales and financial milestones by the Company, as well as other
supplemental benefits at the discretion of the Board of Directors. In addition,
the exercise period of options to purchase 200,000 shares of the Company's Class
A Common Stock pursuant to the SOP, (with an exercise price of $1.75 per share
which are currently exercisable), was extended pursuant to the terms of such
agreement. The agreement also provides that if Mr. Oklewicz is terminated other
than for cause (as defined therein) or dies, the Company will pay to Mr.
Oklewicz (or his spouse or estate if he dies) his compensation until the
expiration of the term of the agreement. The agreement contains a
confidentiality provision and provides that during the term of employment and
for a period of one year after such employment has terminated, Mr. Oklewicz will
not interfere with the Company's customers or solicit the Company's employees.
21
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
The following table sets forth, as of March 19, 1998, certain
information as to the beneficial ownership of Class A Common Stock and Class B
Common Stock of each of the Company's directors and each of the executive
officers shown above, all executive officers and directors as a group, and all
persons known by the Company to be the beneficial owner of more than five
percent of the Company's Class A Common Stock and Class B Common Stock:
Name and Address of Amount and Percent of
Beneficial Stockholder Nature of Outstanding
Beneficial Shares Owned (2)
Ownership
(1)(2)
- --------------------------------------------- ------------ ----------------
Donald W. Barrett 245,000(3) 2.1%
380 Herndon Parkway Herndon, VA 20170
Sydney H. Dankman 225,148(4) 1.9%
380 Herndon Parkway Herndon, VA 20170
Ronald C. Oklewicz 451,219(5) 3.8%
380 Herndon Parkway Herndon, VA 20170
John M. Toups 129,445(6) 1.1%
380 Herndon Parkway Herndon, VA 20170
John P. Diesel 262,862(7) 2.2%
380 Herndon Parkway Herndon, VA 20170
E. Donald Shapiro 105,000(8) *
57 Worth Street
New York, NY 10013
Alan B. Salisbury 105,000(9) *
380 Herndon Parkway Herndon, VA 20170
All current officers and directors as a group 1,542,007(10) 11.5%
(8 persons)
- -----------------------
* Indicates less than one percent.
(1) Except as otherwise indicated, each of the parties listed has sole voting
and investment power with respect to all shares of Common Stock indicated.
Beneficial ownership is calculated in accordance with Rule 13d-3(d) under
the Exchange Act.
22
<PAGE>
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from March 19, 1998 upon the
exercise of options or warrants. Each beneficial owner's percentage
ownership is determined by assuming that options or warrants that are held
by such person ( but not those held by any other person) and which are
exercisable within 60 days from March 19, 1998 have been exercised. Unless
otherwise noted, the Company believes that all persons named in the table
have sole voting and investment power with respect to all shares of Common
Stock beneficially owned by them.
(3) Includes 200,000 shares of Class A Common Stock underlying immediately
exercisable options. Does not include 200,000 options which shall vest and
become exercisable on December 31, 1998; provided, however, that in the
event of a change in control (as defined in Mr. Barrett's employment
agreement) of the Company, the non-vested portion of the options shall
automatically accelerate to the date of such change in control.
(4) Includes 94,862 shares of Class A Common Stock underlying immediately
exercisable stock options and Class C Warrants.
(5) Includes 380,000 shares of Class A Common Stock underlying immediately
exercisable stock options. Also includes 3,438 shares of Class A Common
Stock underlying immediately exercisable Class C Warrants and 17,781 shares
of Class A Common Stock jointly owned by Mr. Oklewicz and his spouse.
(6) Includes 84,445 shares of Class A Common Stock underlying immediately
exercisable options.
(7) Includes 64,445 shares of Class A Common Stock underlying immediately
exercisable options. Also includes 150,917 shares of Class A Common Stock
underlying immediately exercisable Class A, Class B and Class C Warrants
jointly owned by Mr. Diesel and his spouse.
(8) Includes 60,000 shares of Class A Common Stock underlying immediately
exercisable options.
(9) Includes 60,000 shares of Class A Common Stock underlying immediately
exercisable options.
(10) Includes 1,116,440 shares of Class A Common Stock underlying immediately
exercisable stock options and Class A, Class B and Class C Warrants.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
23
<PAGE>
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) EXHIBITS: The following exhibits are filed herewith or incorporated
by reference:
Exhibit Document
No.
3.1 Second Restated Certificate of Incorporation of the
Company. (Incorporated herein by reference to Exhibit
3.1 to the Registrant's Registration Statement on Form
SB-2 (File No. 33-61328)).
3.2 Amendment to Second Restated Certificate of
Incorporation of the Company. (Incorporated herein by
reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form SB-2 (File No.
33-61328)).
3.3 Amendment to Second Restated Certificate of
Incorporation of the Company.
3.4 Form of By-laws of the Company. (Incorporated herein by
reference to Exhibit 3.3 to the Registrant's
Registration Statement on Form SB-2 (File No.
33-61328)).
4.1 Form of Warrant Agreement (including forms of Class A
and Class B Warrant Certificates). (Incorporated herein
by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form SB-2 (File No.
33-61328)).
4.2 Form of Specimen of Class A Common Stock Certificate.
(Incorporated herein by reference to Exhibit 4.2 to the
Registrant's Registration Statement on Form SB-2 (File
No. 33-61328)).
4.3 Form of Specimen of Class B Common Stock Certificate.
(Incorporated herein by reference to Exhibit 4.3 to the
Registrant's Registration Statement on Form SB-2 (File
No. 33-61328)).
4.4 Form of Warrant Agreement (including form Class C
Warrant Certificate) from 1994 Private Placement.
(Incorporated herein by reference to Exhibit 10.17 to
the Registrant's Annual Report on Form 10-KSB for the
year ended December 31, 1994.)
4.5 Form of Warrant Agreement (including form Class C
Warrant Certificate) from 1995 Private Placement.
(Incorporated herein by reference to Exhibit 10.24 to
the Registrant's Annual Report on Form 10-KSB for the
year ended December 31, 1994.)
4.6 Form of Warrant Agreement (including form of Class D
Warrant Certificate) from Bridge Offering. (Incorporated
herein by reference to Exhibit 4.6 to the Registrant's
Registration Statement on Form SB-2 (File No.
33-90278)).
4.7 Form of Warrant Agreement (including Form of Class D
Warrant). (Incorporated herein by reference to Exhibit
4.8 to the Registrant's Registration Statement on Form
SB-2 (File No. 33-90278)).
4.8 Form of Stock Option Agreement (Incorporated herein by
reference to Exhibit 4.7 to the Registrant's
Registration Statement on Form S-3 (File No.
333-17013)).
4.9 Form of Stock Option Agreement for use in connection
with the 1992 Stock Option Plan (Incorporated herein by
reference to Exhibit 4.8 to the Registrant's
Registration Statement on Form S-3 (File No.
333-17013)).
4.10 Warrant to Purchase Shares of Class A Common Stock
issued to Morris
24
<PAGE>
Sedaka on May 30, 1993 (Incorporated herein by reference
to Exhibit 4.9 to the Registrant's Registration
Statement on Form S-3 (File No. 333-17013)).
10.1 Stock Option Plan. (Incorporated herein by reference to
Exhibit 10.1 to the Registrant's Registration Statement
on Form SB-2 (File No. 33-61328)).
10.2 Employment Agreement between the Company and Ronald C.
Oklewicz. (Incorporated herein by reference to Exhibit
10.3 to the Registrant's Registration Statement on Form
SB-2 (File No. 333-00012)).
10.3 Employment Agreement between the Company and L. Charles
Ennis. (Incorporated herein by reference to Exhibit 10.4
to the Registrant's Registration Statement on Form SB-2
(File No. 33-61328)).
10.4 Sales Agreement between International Business Machines
Corporation and the Company dated January 27, 1993.
(Incorporated herein by reference to Exhibit 10.6 to the
Registrant's Registration Statement on Form SB-2 (File
No. 33-61328)).
10.5 Technology Partner Product Agreement between GTE Vantage
Solutions and the Company. (Incorporated herein by
reference to Exhibit 10.7 to the Registrant's
Registration Statement on Form SB-2 (File No.
33-61328)).
10.6 Agreement for Repair and Inventory Management Service
between the Company and Logistics Management
Incorporated. (Incorporated herein by reference to
Exhibit 10.8 to the Registrant's Registration Statement
on Form SB-2 (File No. 33-61328)).
10.7 Form of Non-Disclosure and Non-Interference Agreement
between the Company and its employees. (Incorporated
herein by reference to Exhibit 10.10 to the Registrant's
Registration Statement on Form SB-2 (File No.
33-61328)).
10.8 Letter Agreement between the Company and the Underwriter
regarding future financing transactions. (Incorporated
herein by reference to Exhibit 10.12 to the Registrant's
Registration Statement on Form SB-2 (File No.
33-61328)).
10.9 Employment Agreement, dated as of August 1, 1993,
between the Company and Joseph J. Elkins. (Incorporated
herein by reference to Exhibit 10.14 to the Registrant's
Annual Report on Form 10-KSB for the year ended December
31, 1993.)
10.10 Amendment to the Sales Agreement between International
Business Machines Corporation and the Company, and
Supplements to same, dated February 28, 1994.
(Incorporated herein by reference to Exhibit 10.13 to
the Registrant's Annual Report on Form 10-KSB for the
year ended December 31, 1993.)
10.11 Agency Agreement with D.H. Blair Investment Banking
Corp. dated June 10, 1994 from 1994 Private Placement.
(Incorporated herein by reference to Exhibit 10.18 to
the Registrant's Annual Report on Form 10-KSB for the
year ended December 31, 1994.)
10.12 Merger and Acquisition Agreement with D.H. Blair
Investment Banking Corp. dated June 21, 1994 from 1994
Private Placement. (Incorporated herein by reference to
Exhibit 10.19 to the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1994.)
10.13 Amended and Restated Stock Option Plan. (Incorporated
herein by reference to Exhibit 10.20 to the Registrant's
Annual Report on Form 10-KSB for the year ended December
31, 1994.)
10.14 1994 Employee Stock Purchase Plan. (Incorporated herein
by reference to
25
<PAGE>
Exhibit 10.21 to the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1994.)
10.15 Non-Employee Director Stock Option Plan. (Incorporated
herein by reference to Exhibit 10.22 to the Registrant's
Annual Report on Form 10-KSB for the year ended December
31, 1994.)
10.16 Investment Agreement and Various Exhibits from Private
Placement Transaction completed in March 1995.
(Incorporated herein by reference to Exhibit 10.23 to
the Registrant's Annual Report on Form 10-KSB for the
year ended December 31, 1994.)
10.17 Draft Agency Agreement with D.H. Blair Investment
Banking Corp. from 1995 Private Placement. (Incorporated
herein by reference to Exhibit 10.25 to the Registrant's
Annual Report on Form 10-KSB for the year ended December
31, 1994.)
10.18 Draft Merger and Acquisition Agreement with D.H. Blair
Investment Banking Corp. from 1995 Private Placement.
(Incorporated herein by reference to Exhibit 10.26 to
the Registrant's Annual Report on Form 10-KSB for the
year ended December 31, 1994.)
10.19 Amendment to the Sales Agreement between International
Business Machines Corporation and the Company referenced
in 10.6 above, and Supplements to same, dated as of June
3, 1994. (Incorporated herein by reference to Exhibit
10.27 to the Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1994.)
10.20 Amendment to the Sales Agreement between International
Business Machines Corporation and the Company referenced
in 10.6 above, and Supplements to same, dated as of
February 23, 1995 and February 27, 1995. (Incorporated
herein by reference to Exhibit 10.28 to the Registrant's
Annual Report on Form 10-KSB for the year ended December
31, 1994.).
10.21 Agency Agreement with D.H. Blair Investment Banking
Corporation dated July 11, 1995. (Incorporated herein by
reference to Exhibit 10.28 to the Registrant's
Registration Statement on Form SB-2 (File No.
33-90378)).
10.22 Document relating to Private Placement to the Consultant
in March, 1995. (Incorporated herein by reference to
Exhibit 10.29 to the Registrant's Registration Statement
on Form SB-2 (File No. 33-90378)).
10.23 Agreement between the Company and an Insurance Company
for consulting and development services. (Incorporated
herein by reference to Exhibit 10.30 to the Registrant's
Registration Statement on Form SB-2 (File No.
33-90378)).
10.24 Agreement between the Company and IBM dated January 25,
1996, providing for resolution of certain disputes and
other matters. (Incorporated herein by reference to
Exhibit 10.31 to the Registrant's Registration Statement
on Form SB-2 (File No. 333-00012)).
10.25 Security Agreement between the Company and a certain
Lender dated February 16, 1996. (Incorporated herein by
reference to Exhibit 10.32 to the Registrant's
Registration Statement on Form SB-2 (File No.
333-00012)).
10.26 Letter dated March 19, 1996, from IBM to the Company
granting extension to April 1, 1996, with respect to
certain credit requirements. (Incorporated herein by
reference to Exhibit 10.33 to the Registrant's
Registration Statement on Form SB-2 (File No.
333-00012)).
26
<PAGE>
23.1* Consent of Ernst & Young LLP, independent auditors.
27.1* Financial Data Schedule
- -----------------------------------------------
* Filed herewith
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 30, 1998 /S/ DONALD W. BARRETT
---------------------
Donald W. Barrett
Chairman and Chief Executive
Officer
Date: March 30, 1998 /S/ ROBERT D. RUSSELL
---------------------
Robert D. Russell
Vice President and Chief Financial
Officer Principal Financial and
Accounting Officer
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Date: March 25, 1998 /S/ SYDNEY H. DANKMAN
---------------------------
Sydney H. Dankman, Director
Date: March 26, 1998 /S/ JOHN P. DIESEL
---------------------------
John P. Diesel, Director
Date: March 30, 1998 /s/ RONALD C. OKLEWICZ
---------------------------
Ronald C. Oklewicz, Director
Date: March 30, 1998 /s/ ALAN B. SALISBURY
---------------------------
Alan B. Salisbury, Director
Date: March , 1998
---------------------------
E. Donald Shapiro, Director
Date: March 25, 1998 /S/ JOHN M. TOUPS
---------------------------
John M. Toups, Director
<PAGE>
TELEPAD CORPORATION
INDEX TO FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors...........................F-2
Balance Sheets..............................................................F-3
Statements of Operations....................................................F-4
Statements of Stockholders' Equity (Deficit)................................F-5
Statements of Cash Flows....................................................F-6
Notes to Financial Statements...............................................F-7
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
TelePad Corporation
We have audited the accompanying balance sheets of TelePad Corporation as of
December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the years then ended. 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 TelePad Corporation at December
31, 1997 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
As discussed in Note 8 to the financial statements, the Company's recurring
losses from operations and negative operating cash flows raise substantial doubt
about its ability to continue as a going concern. Management's plans as to these
matters are also described in Note 8. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Vienna, Virginia
March 6, 1998
F-2
<PAGE>
TELEPAD CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,588,790 $ 1,418,770
Short-term investments -- 4,078,679
Restricted cash (Note 1) -- 2,000,000
Accounts receivable, less allowance of $88,000
at December 31, 1997 and $107,000 at December 31, 1996 1,419,231 668,922
Inventory 1,174,507 3,474,782
Advance to Sanmina (Note 1) 1,286,284 --
Other current assets 184,133 243,988
------------ ------------
Total current assets 5,652,945 11,885,141
Furniture and equipment:
Office furniture and equipment 203,140 197,932
Computer equipment 668,378 880,656
------------ ------------
871,518 1,078,588
Less accumulated depreciation (489,895) (505,639)
------------ ------------
Net furniture and equipment 381,623 572,949
Investment in Intellibit (Note 1) 200,000 --
Deposits and other assets 23,591 27,689
============ ============
Total assets $ 6,258,159 $ 12,485,779
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,309,680 $ 1,991,805
Deferred revenue 13,601 34,643
------------ ------------
Total current liabilities 2,323,281 2,026,448
Commitments
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 December 31,1997 and 1996, respectively 117,556 115,589
Class B common stock, 593,063 shares designated,
no shares and 150,000 shares issued and outstanding
at December 31,1997 and 1996, respectively -- 1,500
Additional paid-in capital 39,283,613 39,250,820
Accumulated deficit (35,466,291) (28,908,578)
------------ ------------
Total stockholders' equity 3,934,878 10,459,331
------------ ------------
Total liabilities and stockholders' equity $ 6,258,159 $ 12,485,779
============ ============
</TABLE>
See accompanying notes
F-3
<PAGE>
TELEPAD CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
1997 1996
------------ ------------
Revenues:
TelePad products $ 3,348,398 $ 2,017,811
Service contracts 244,179 222,293
------------ ------------
Total revenues 3,592,577 2,240,104
Costs and expenses:
Cost of goods sold - Telepad products 4,282,929 2,128,342
Cost of goods sold - service contracts 162,327 101,698
Loss on inventory purchase commitment 654,468 --
Costs related to manufacturing startup -- 317,607
Research and development 942,793 1,515,933
Selling, general and administrative 4,406,679 4,351,510
------------ ------------
Total costs and expenses 10,449,196 8,415,090
------------ ------------
Loss from operations (6,856,619) (6,174,986)
Interest income 310,442 542,447
Interest expense (214) (253,197)
Amortization of debt issue costs -- (118,302)
Other expenses
(11,322) (85,644)
------------ ------------
Net loss $ (6,557,713) $ (6,089,682)
============ ============
Net loss per share $ (0.56) $ (0.62)
============ ============
Weighted average shares outstanding 11,745,551 9,856,500
============ ============
See accompanying notes
F-4
<PAGE>
TELEPAD CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock Additional Total
------------------------------------------------------- Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity(Deficit)
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995 4,436,175 $ 44,361 555,563 $ 5,556 $ 18,657,124 $(22,818,896) $ (4,111,855)
Issuance of common stock
and warrants, net 6,555,000 65,550 -- -- 20,449,921 -- 20,515,471
Conversion of Class B
common stock 405,563 4,056 (405,563) (4,056) -- -- --
Exercise of common stock
warrants 28,162 282 -- -- 98,218 -- 98,500
Exercise of stock options 134,005 1,340 -- -- 45,557 -- 46,897
Net loss -- -- -- -- -- (6,089,682) (6,089,682)
-------------------------------------------------------------------------------------------------------
Balance at December 31,
1996 11,558,905 $ 115,589 150,000 $ 1,500 $ 39,250,820 $(28,908,578) $ 10,459,331
Exercise of stock options -- -- 37,500 375 125 -- 500
Conversion of Class B
common stock 187,500 1,875 (187,500) (1,875) -- -- --
Exercise of common stock
warrants 9,219 92 -- -- 32,668 -- 32,760
Net loss -- -- -- -- -- (6,557,713) (6,557,713)
-------------------------------------------------------------------------------------------------------
Balance at December 31,
1997 11,755,624 $ 117,556 -- -- $ 39,283,613 $(35,466,291) $ 3,934,878
=======================================================================================================
</TABLE>
See accompanying notes
F-5
<PAGE>
TELEPAD CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (6,557,713) $ (6,089,682)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 225,703 217,801
Amortization of debt discount -- 118,302
Provision for loss on accounts receivable 36,478 7,169
Provision for loss of inventory value 821,245 --
Loss on inventory purchase commitment 654,468 --
Changes in assets and liabilities:
Restricted cash 2,000,000 (2,000,000)
Accounts receivable (786,787) (203,367)
Inventory 1,479,030 (3,071,049)
Advance to Sanmina (1,286,284) --
Other current assets 59,855 (147,742)
Deposits and other assets 4,098 (6,628)
Accounts payable and accrued expenses (203,763) (829,936)
Deferred revenue (21,042) 16,925
------------ ------------
Net cash used in operating activities (3,574,712) (11,988,207)
INVESTING ACTIVITIES
Purchase of furniture and equipment (167,207) (433,160)
Investment in Intellibit Corporation (200,000) --
Purchase of short-term investments -- (14,878,679)
Sales of short-term investments 4,078,679 10,800,000
------------ ------------
Net cash provided by (used in) investing activities 3,711,472 (4,511,839)
FINANCING ACTIVITIES
Net cash proceeds from issuance of common stock 33,260 20,660,868
Proceeds from notes payable
-- 750,000
Repayment of notes payable -- (4,750,000)
------------ ------------
Net cash provided by financing activities 33,260 16,660,868
------------ ------------
Net increase in cash and cash equivalents 170,020 160,822
Cash and cash equivalents, beginning of year 1,418,770 1,257,948
============ ============
Cash and cash equivalents, end of year $ 1,588,790 $ 1,418,770
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Actual cash payments for interest $ 214 $ 418,685
============ ============
</TABLE>
See accompanying notes
F-6
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
TelePad Corporation (the "Company") markets hardware and software products and
solutions to assist private businesses and governmental entities in managing,
communicating and processing information. The Company's principal products are
portable, notebook-sized, pen-based computers and related customized software.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company purchases all of its TelePad 3 computers, currently its only
product, from a single manufacturer, Sanmina Corporation ("Sanmina"). Although
management believes that alternative sources of supply are available, a change
in manufacturers could cause further delays in production and adversely affect
demand for the TelePad product and the Company's operating results.
The Company has not generated sufficient revenues from sales to cover operating
expenses. Success of the Company's business strategy is dependent upon growth in
the Company's revenue from its TelePad 3 product and related services. The
business strategy is dependent upon the TelePad 3 computer being competitive in
the market and the Company's ability to sell the existing TelePad 3 inventory
and inventory resulting from purchase commitments. The Company continues to
enhance the TelePad 3 to remain within the competitive range with respect to
technology, but more emphasis is being placed on applying the Company's
knowledge of field force automation by offering total integrated solutions to
potential customers. Such solutions include reselling hardware from
manufacturers other than the Company's and offering software, systems
integration and services.
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.
Three customers accounted for approximately 52% and 53% of total revenue for the
years ended December 31, 1997 and 1996, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Short-term Investments
The short-term investments were stated at cost, which as of December 31, 1996
approximated market value, and were invested in a short-term, fixed income
securities fund.
F-7
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Restricted Cash and Advance to Sanmina
In order to secure credit for production of the TelePad 3 computer, the Company
provided a letter of credit to Sanmina in the amount of $2,000,000. This letter
of credit was secured by $2,000,000, which was invested in an interest-bearing
account and was pledged as security. In June 1997 the letter of credit was
amended to allow Sanmina to draw upon the letter of credit as an advance payment
against future invoicing of finished and semifinished product. Sanmina agreed to
return the letter of credit to the Company for cancellation upon completion of
the advance payments. The Company advanced $1,652,784 to Sanmina in July and
September and the letter of credit expired September 30, 1997. On December 31,
1997 the advance to Sanmina was reduced by $366,500 upon receipt of inventory
from Sanmina, leaving a balance on the advance of $1,286,284, which is
unsecured.
Inventory
Inventory is stated at the lower of cost or market as determined on a FIFO
(first-in, first-out) basis. The Company provides for inventory reserves or
write-offs as inventory is identified as being obsolete, slow-moving, or
unsaleable.
Investment in Intellibit
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. The Company is
accounting for this investment using the cost method. Intellibit Corporation is
a privately held developer of digital signal processing products.
Furniture and Equipment
Office furniture and equipment and computer equipment, including demonstration
units, are recorded at cost and depreciated using the straight-line method over
estimated useful lives ranging from three to seven years.
Warranty
The Company provides, by a current charge to operations, an amount it estimates
will be required to cover future warranty obligations for products sold during
the year. The accrued liability for warranty costs is included in the caption
"Accounts payable and accrued expenses" in the accompanying balance sheets.
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 all prior year net loss per share information. Basic net loss per share
was determined by dividing net loss by the weighted average number of common
shares outstanding during each year. 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 in Note 7.
F-8
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Debt Issue Costs
The costs related to the issuance of notes payable are expensed during the
period of borrowing.
Stock-Based Compensation
During 1996, the Company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123
allows companies to either account for stock-based compensation under the new
provisions of SFAS No. 123 or under the provisions of APB 25, but requires pro
forma disclosure in the footnotes to the financial statements as if the
measurement provisions of SFAS No. 123 had been adopted. The Company intends to
continue accounting for its stock-based compensation in accordance with the
provisions of APB 25. As such, the adoption of SFAS No. 123 did not impact the
financial position or results of operations of the Company.
Recently Issued Accounting Standards
In June 1997, FASB issued Statement No. 130, "Reporting Comprehensive Income"
which is effective for fiscal years beginning after December 15, 1997. The
Statement establishes standards for reporting and display of comprehensive
income and its components in financial statements. The Company will adopt
Statement No. 130 in the first quarter of 1998 and will provide the financial
statement disclosures as required by the Statement. The application of the new
rules will not have an impact on the Company's financial position or results of
operations.
In June 1997, FASB issued Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which is effective for fiscal years
beginning after December 15, 1997. The Statement changes the way public
companies report segment information in annual financial statements and also
requires those companies to report selected segment information in interim
financial statements to shareholders. The Statement also established standards
for related disclosures about products and services, geographic areas, and major
customers. The Company will adopt Statement No. 131 in 1998 resulting in
additional segment disclosures as required by the Statement. The application of
the new rules will not have an impact on the Company's financial position or
results of operations.
2. FINANCING ARRANGEMENTS
On February 15, 1996, the Company and an individual investor, who had previously
provided his personal guaranty of the Company's obligations to International
Business Machines Corporation ("IBM") for the production of 400 TelePad 3
computers, entered into an agreement whereby the individual investor loaned the
Company $750,000 evidenced by a promissory note which had a term of one year,
but included the right to require early retirement of the obligation at the
final closing of the secondary public offering. The promissory note carried
interest at the rate of 20% and contained a loan origination fee of
approximately $68,000. The promissory note was secured by all of the Company's
assets. The conditions of the agreement required that a portion of the proceeds
from the note be used to satisfy existing obligations to IBM and that IBM
release the guaranty. The Company received net proceeds, after disbursements to
IBM and prepayment of one-half of the annual interest due under the promissory
note, of approximately $193,000. On May 1, 1996, the Company paid $825,000 to
the individual investor to retire the promissory note. The $825,000 payment
included the principal amount of $750,000 and $75,000 in interest. The
respective security interest has been released.
F-9
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS
2. FINANCING ARRANGEMENTS (CONTINUED)
During 1995, the Company was provided with bridge financing of $4,000,000 less
direct expenses of $573,995 through the sale of 80 bridge units. Each bridge
unit consisted of a $50,000 promissory note and 25,000 common stock bridge
warrants. The promissory notes bore interest at the rate of 10% per annum and
were due upon the earlier of July 26, 1996, or the closing of the Company's
secondary public offering (See Note 3). On April 25, 1996 the Company paid
$4,268,685 to repay the $4,000,000 principal amount of the promissory notes and
accrued interest in the amount of $268,685.
Each common stock bridge warrant entitled the holder to purchase one share of
the Company's Class A common stock at an exercise price of $2.50 per share,
subject to adjustment. The warrants expire on July 26, 2000. The Company
allocated $400,000 of the total notes payable proceeds to the warrants issued.
The $400,000 allocated to the warrants was amortized to interest expense using
the effective interest method over the period the related debt was expected to
be outstanding. Upon completion of the public offering, each common stock bridge
warrant automatically converted into one Class D warrant with the same terms as
those issued in the offering.
3. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company's certificate of incorporation provides for 5,000,000 shares of
preferred stock, $.01 par value that are authorized for future issuance, with
rights and preferences to be determined by the Board of Directors.
COMMON STOCK
On April 3, 1996, the Company completed a public offering of 20,000 units (the
"Units"). Each Unit consisted of 285 shares of Class A common stock and 1,000
Class D warrants and was sold for $1,000 per Unit, pursuant to which the Company
raised $20,000,000. The net proceeds to the Company from the Unit offering
amounted to approximately $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 approximately $2,736,000 from the exercise of the
over-allotment option.
During 1995, the Company completed a private placement of 51.5 units. Each unit
consisted of 12,500 Class A common shares and 6,738.5 Class C warrants. The
Company received proceeds of approximately $2,120,000, net of $455,000 in
expenses directly related to the offering. Each Class C warrant entitles the
holder to purchase, within five years from the closing date, one share of Class
A common stock at $4.00 per share, subject to adjustment. The shares and
warrants sold in this private placement have demand registration rights and the
issuance of such shares and warrants had a dilutive effect on the holders of
Class A warrants and Class B warrants. The placement agent in this offering
received a unit purchase option entitling it to purchase 15.45 units on the same
general terms and conditions as the participants in the private placement.
During 1995, the Company amended its certificate of incorporation to increase
authorized common stock to 95,000,000 shares, of which 94,406,937 are designated
as Class A common stock and the remaining 593,063 as Class B common stock. Class
B common stock is substantially identical to Class A common stock except that
holders of Class B common stock have five votes per share on each matter
considered by the stockholders. The Class B shares are each convertible into one
share of Class A common stock.
F-10
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS
3. STOCKHOLDERS' EQUITY (CONTINUED)
In March 1995, the Company issued 54,000 shares of Class A common stock in lieu
of cash as compensation for services. The aggregate market value of these shares
totaled approximately $332,000 on the dates of issuance and is reflected in
these financial statements as a charge against earnings and as additions to
common stock and additional paid-in capital. Two transactions were involved. In
the first, the Company entered into an agreement with an individual investor
under which the investor guaranteed IBM's security interest in the production of
400 completed TelePad 3 computers. The guarantee was backed by a $1.5 million
irrevocable letter of credit provided by a commercial bank. As part of the
consideration for the investor's guarantee, the Company issued the investor
50,000 shares of the Company's Class A common stock. The Company valued this
first transaction at $311,748, which represents the market value of the shares
at the date of the transaction. In the second transaction, the Company issued
4,000 shares of the Company's Class A common stock as consideration for
financial consulting services provided by an investment banker. The Company
valued this second transaction at $20,000, which represents the market value of
the shares at the date of the transaction.
At December 31, 1997, the Company had reserved 42,636,765 shares of common stock
for issuance upon exercise of stock options and purchase warrants. Shares of
unrestricted common stock issued for other than cash have been assigned amounts
equivalent to the fair market value of the shares issued. Compensatory stock
options issued have been assigned compensation values based upon the excess of
the fair value of the common stock underlying such options, at the grant date,
over the exercise price of the shares.
STOCK OPTIONS AND WARRANTS
The Non-Qualified Incentive Stock Option Plan (the "NQ Plan") was adopted by the
Board of Directors and approved by the stockholders during 1992. The purpose of
the NQ Plan is to compensate various key executives and key employees for
services rendered to or on behalf of the Company. No further options may be
issued under the NQ Plan.
The Company established an additional stock option plan in April 1993 (the "1993
Plan") providing for the grant of options to purchase shares of Class A common
stock to key employees and others at terms determined by the Board of Directors.
An amendment to the 1993 Plan, approved during 1994, increased the number of
options available under this plan from 150,000 to 975,000. In February 1995, the
Board of Directors canceled 600,000 of the options available for grant under the
1993 Plan. In June 1995, stockholders of the Company approved an amendment to
the 1993 Plan which increased the number of options available under this plan
from 375,000 to 975,000.
During 1994, two new plans were adopted by the Board of Directors and approved
by the stockholders. The Employee Stock Purchase Plan (the "SPP") was
established to provide eligible employees a means to purchase Class A common
stock through payroll deductions, subject to certain limitations. In addition,
the 1994 Non-Employee Director Stock Option Plan (the "NESOP") was established
to maintain the Company's ability to attract and retain the services of
experienced and highly qualified directors. Pursuant to the NESOP, eligible
directors will annually be granted an option, subject to vesting over a three
year period, to purchase 6,667 shares of Class A common stock.
A total of 250,000 shares of Class A common stock may be purchased under the SPP
and 175,000 shares may be available for purchase under the NESOP. At December
31, 1997, no shares had been purchased under the SPP.
F-11
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS
3. STOCKHOLDERS' EQUITY (CONTINUED)
The Company established an additional stock option plan in September 1996 (the
"1996 Plan") providing for the grant of options to purchase shares of Class A
common stock to key employees (including directors and officers who are key
employees) and to consultants and directors who are not employees at terms
determined by the Board of Directors. The aggregate number of shares of Class A
common stock for which options may be granted under the 1996 Plan shall not
exceed 1,200,000.
From time to time, the Company has also granted options or warrants to purchase
common stock outside the above noted plans to investors, employees and
consultants some of which were in consideration for services performed.
The following table summarizes all option activity for the years ended December
31:
1997 1996
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
---------------------------------------------
Outstanding at beginning of year 1,755,516 $3.99 1,245,638 $3.58
Options granted 369,000 $0.48 956,000 $4.46
Options exercised (37,500) $0.01 (134,005) $0.35
Options canceled or expired (174,375) $5.16 (312,117) $5.39
---------- ----------
Outstanding at end of year 1,912,641 $3.28 1,755,516 $3.99
========== ==========
Options exercisable at year end 828,389 $3.79 797,458 $2.82
The options outstanding at December 31, 1997 range in price from $.33 per share
to $7.88 per share and have a weighted average remaining contractual life of 4.1
years.
The Company applies APB 25 in accounting for its stock option incentive plans
and, accordingly, recognizes compensation expense for the difference between the
fair value of the underlying common stock and the grant price of the option at
the date of grant. The effect of applying SFAS No. 123 on 1997 and 1996 pro
forma net loss as stated above is not necessarily representative of the effects
on reported net income or loss for future years due to, among other things, (1)
the vesting period of the stock options and (2) the fair value of additional
stock options in future years. Had compensation cost for the Company's stock
option plans been determined based upon the fair value at the grant date for
awards under the plans consistent with the methodology prescribed under SFAS No.
123, the Company's net loss in 1997 and 1996 would have been approximately $7.2
million, or $.62 per share, and $6.7 million and $.68 per share, respectively.
The fair value of the options granted during 1997 and 1996 are estimated as $.28
and $1.30 per share, respectively, on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: dividend yield 0%,
volatility of 122.8% for 1997 and 37.9% for 1996, risk-free interest rate of
5.58% for 1997 and 6.12% for 1996, and expected life of 3 years.
F-12
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS
3. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes all Class A, Class B, Class C and Class D warrant
activity for the years ended December 31:
1997 1996
----------- -----------
Outstanding at beginning of year 30,263,568 7,291,730
Issued -- 23,000,000
Exercised (9,219) (28,162)
=========== ===========
Outstanding at end of year 30,254,349 30,263,568
=========== ===========
All warrants outstanding as of December 31, 1997, are at exercise prices ranging
from $3.50 to $6.81 per share.
4. INCOME TAXES
There was no provision for income taxes for the years ended December 31, 1997
and 1996 as a result of the Company's net loss for the years then ended.
Components of the net deferred tax asset at December 31, are as follows:
1997 1996
------------ ------------
Deferred tax liabilities:
Depreciation and amortization $ 29,000 $ 37,000
Deferred tax assets:
Compensation expenses related to options 322,000 322,000
Net operating loss carryforward 11,909,000 9,105,000
Inventory valuation 687,000 72,000
Other 94,000 121,000
------------ ------------
Total deferred tax assets 13,012,000 9,620,000
------------ ------------
Net deferred tax assets before valuation allowance 12,983,000 9,583,000
Valuation allowance (12,983,000) (9,583,000)
============ ============
Net deferred tax assets $ -- $ --
============ ============
F-13
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS
4. INCOME TAXES (CONTINUED)
The effective income tax rate varied from the federal statutory tax rate for the
years ended December 31 as follows:
1997 1996
----------- ---------
Statutory rate: 34.0% 34.0%
State income taxes - net of federal income tax
benefit 4.0 4.0
Valuation allowance on net deferred tax benefits (38.0) (38.0)
========== ==========
Tax rate -% -%
========== ==========
At December 31, 1997, the Company has available approximately $31,340,000 in net
operating loss and tax credit carryforwards which expire at varying dates
through 2012. These carryforwards may be significantly limited under the
Internal Revenue Code as a result of ownership changes experienced by the
Company.
5. COMMITMENTS
The Company's arrangement with Sanmina provides for ordering product four months
in advance of production to accommodate long lead items. At December 31, 1997,
the Company had approximately $1,900,000 in outstanding purchase orders issued
to Sanmina. Because the specific configurations of the TelePad 3 computer
included in this outstanding commitment are nearing the end of a product cycle,
the Company reserved $654,000 in 1997 to recognize the loss of value and
obsolete parts. The outstanding purchase orders consist primarily of kits of
TelePad 3 computers which will be assembled and tested at the Company's facility
in Herndon, Virginia.
The Company leases office space in Herndon, Virginia under a noncancelable
operating lease which contains a renewal option. Total rent expense was $159,000
and $135,000 for the years ended December 31, 1997 and 1996, respectively.
Future minimum lease payments under the non-cancelable operating lease are as
follows:
1998 $ 170,231
1999 86,373
------------
Total $ 256,604
============
The Company has entered into employment agreements with two of its officers
providing base salaries of $150,000 to $250,000. The base salaries are subject
to increase upon approval by the Board of Directors.
6. EMPLOYEE BENEFIT PLAN
During 1994, the Company established a defined contribution retirement plan (the
"Plan") covering all employees who have at least six months of service and are
21 years of age or older. Employees may elect to contribute up to 15% of their
annual compensation subject to limits detailed in the Internal Revenue Code.
Each year the Company may make a discretionary contribution to the Plan. During
the years ended December 31, 1997 and 1996, the Company did not make any
contributions to the Plan.
F-14
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS
7. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per
share :
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996
----------- -----------
Net loss per share $(6,557,713) $(6,089,682)
=========== ===========
Weighted average shares:
Basic net loss per share -
weighted average shares 11,745,551 9,856,500
Effect of dilutive securities:
Stock options -- --
Warrants -- --
Diluted net loss per share -
=========== ===========
adjusted weighted average shares 11,745,551 9,856,500
=========== ===========
Basic net loss per share $ (0.56) $ (0.62)
=========== ===========
Diluted net loss per share $ (0.56) $ (0.62)
=========== ===========
Options to purchase approximately 1.9 million shares and 1.8 million shares of
common stock with exercise prices ranging between $.33 and $7.88 per share were
outstanding during 1997 and 1996, respectively, but were not included in the
computation of diluted net loss per share because the effect would be
antidilutive. Warrants to purchase approximately 30.3 million shares of common
stock with exercise prices ranging between $3.50 and $6.81 per share were
outstanding during 1997 and 1996 but were not included in the computation of
diluted net loss per share because the effect would be antidilutive.
8. MANAGEMENT PLANS
The accompanying financial statements have been prepared on the basis that the
Company will continue as a going concern. The Company has incurred cumulative
losses to date of approximately $35,466,000, including $6,558,000 for the year
ended December 31, 1997. The continued existence of the Company is dependent on
the ability of the Company to generate revenues sufficient to cover operating
expenses and on obtaining additional financing, the outcome of which cannot be
determined at this time. 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. These conditions raise substantial doubt about the
Company's ability to raise additional capital.
F-15
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS
8. MANAGEMENT PLANS (CONTINUED)
On February 24, 1998, the directors of the Company adopted resolutions proposing
to recommend to stockholders that stockholders authorize an Amendment to the
Company's Certificate of Incorporation to effect a 1 for 10 reverse stock split
of the Company's issued shares of common stock (the "Reverse Split"). If the
Reverse Split is authorized by stockholders at the annual meeting of
stockholders scheduled on May 4, 1998, management expects that the share price
of the Company's Class A common stock will trade above the one dollar
maintenance price level, however, there can be no assurance as to the approval
of the Reverse Split by stockholders or, if the Reverse Split is approved, the
effect on the market price of the Class A common stock.
In the event that the Company is unable to generate revenues sufficient to cover
operating expenses or obtain additional financing, the Company may be unable to
satisfy most of the current liabilities and would be unable to sustain its
operations at the current level thereafter. The Company would then be required
to radically reduce its operations and may be required to seek protection under
the United States Bankruptcy Code. The financial statements do not include any
adjustments that might result from this uncertainty.
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in 1) the Registration Statement
(Form S-3 No. 333-17013) of Telepad Corporation and in the related Prospectus,
2) the Registration Statement (Form S-8 No. 333-08471) pertaining to the Stock
Option Plan for Non-Employee Directors of Telepad Corporation, and 3) ) the
Registration Statement (Form S-8 No. 333-08473) pertaining to the Amended and
Restated 1993 Stock Option Plan of Telepad Corporation of our report dated March
6, 1998, with respect to the financial statements of Telepad Corporation
included in this Annual Report (Form 10-KSB) for the year ended December 31,
1997.
/s/ Ernst & Young LLP
Vienna, Virginia
March 30, 1998
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<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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