SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998.
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-21934
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TELEPAD CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 52-1680936
- --------------------------------- -------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
380 Herndon Parkway, Suite 1900, Herndon, Virginia 20170
- --------------------------------------------------- -------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (703) 834-9000
Not Applicable
---------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 ninety days.
Yes X No
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Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practical date:
Shares Outstanding
Class of Common Stock at November 10, 1998
--------------------- --------------------
Class A Common Stock 13,021,874 shares, $0.01 par value
Class B Common Stock none
Transitional Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
TELEPAD CORPORATION
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
Page No.
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<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - September 30, 1998 (unaudited)
and December 31, 1997 3
Statements of Operations for the three and nine-month periods
ended September 30, 1998 (unaudited) and 1997 (unaudited) 4
Statements of Cash Flows for the nine-month periods
ended September 30, 1998 (unaudited) and 1997 (unaudited) 5
Notes to Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
<PAGE>
TELEPAD
CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------------ -------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 187,145 $ 1,588,790
Accounts receivable, less allowance of $112,000
at September 30, 1998 and $88,000 at December 31, 1997 1,783,979 1,419,231
Inventory 2,716,675 1,174,507
Advance to Sanmina - 1,286,284
Other current assets 24,853 184,133
------------------ -------------------
Total current assets 4,712,652 5,652,945
------------------ -------------------
Furniture and equipment:
Office furniture and equipment 201,132 203,140
Computer equipment 696,888 668,378
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898,020 871,518
Less accumulated depreciation (600,353) (489,895)
------------------ -------------------
Net furniture and equipment 297,667 381,623
Investment in affiliates 200,000 200,000
Deposits and other assets 239,730 23,591
Goodwill, net 2,984,953 -
================== ===================
Total assets $ 8,435,002 $ 6,258,159
================== ===================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 3,250,812 $ 2,309,680
Notes payable 1,820,941 -
Deferred revenue - 13,601
------------------ -------------------
Total current liabilities 5,071,753 2,323,281
Preferred stock, $.01 par value, 5,000,000 shares authorized:
Series C 7% cumulative redeemable convertible preferred stock,
950,000 shares designated, 950,000 and no shares issued and outstanding
at September 30, 1998 and December 31, 1997,
respectively; liquidation preference of $950,000 at September 30, 1998 1,009,850 -
Stockholders' equity
Common stock, $.01 par value; 95,000,000 shares authorized:
Class A common stock, 94,406,937 shares designated,
13,021,874 and 11,755,624 shares issued and outstanding
at September 30, 1998 and December 31, 1997, respectively 130,219 117,556
Class B common stock, 593,063 shares designated, no shares issued or
outstanding at September 30, 1998
and December 31,1997, respectively - -
Additional paid-in capital 40,666,213 39,283,613
Accumulated deficit (38,443,033) (35,466,291)
------------------ -------------------
Total stockholders' equity 2,353,399 3,934,878
================== ===================
Total liabilities and stockholders' equity $ 8,435,002 $ 6,258,159
================== ===================
</TABLE>
See accompanying notes
3
<PAGE>
TELEPAD CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
------------------ ------------------- ----------------- -----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
<S> <C> <C> <C> <C>
Product related $ 2,287,094 $ 1,217,234 $ 4,277,103 $ 2,662,813
Service contracts 304,411 90,899 585,981 123,230
------------------ ------------------- ----------------- -----------------
Total revenues 2,591,505 1,308,133 4,863,084 2,786,043
Costs and expenses:
Cost of goods sold - products 1,623,656 1,226,816 3,383,177 2,575,803
Cost of goods sold - service contracts 317,161 62,214 543,792 75,631
Research and development 61,593 154,924 321,304 778,622
Selling, general and administrative 1,037,798 1,132,883 3,502,464 3,407,242
------------------ ------------------- ----------------- -----------------
Total costs and expenses 3,040,208 2,576,837 7,750,737 6,837,298
------------------ ------------------- ----------------- -----------------
Loss from operations (448,703) (1,268,704) (2,887,653) (4,051,255)
Interest income 3,371 127,042 21,852 290,384
Interest expense (82,398) (214) (109,226) (214)
Other income (expense) 17 (7,904) (1,715) (14,282)
------------------ ------------------- ----------------- -----------------
Net loss available for common
stockholders $ (527,713) $ (1,149,780) $ (2,976,742) $ (3,775,367)
================== =================== ================= =================
Net loss per share $ (0.04) $ (0.10) $ (0.24) $ (0.32)
================== =================== ================= =================
Diluted net loss per share $ (0.04) $ (0.10) $ (0.24) $ (0.32)
================== =================== ================= =================
Weighted average shares outstanding 13,021,874 11,755,624 12,502,200 11,742,194
================== =================== ================= =================
</TABLE>
See accompanying notes
4
<PAGE>
TELEPAD CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
--------------------- ---------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities
Net loss $ (2,976,742) $ (3,775,367)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 303,950 196,675
Accrued interest on notes payable 55,941 -
Provision for loss on accounts receivable 13,757 18,924
Provision for gain/loss on foreign exchange (6,196) -
Provision for loss in inventory value 41,085 -
Changes in assets and liabilities net of effects from purchase of L&E:
Restricted cash - 1,652,784
Accounts receivable 709,145 (1,443,688)
Inventory (872,160) 1,222,781
Advance to Sanmina 1,286,284 -
Other current assets 168,061 (1,418,869)
Deposits and other assets 8,643 (195,900)
Accounts payable and accrued expenses (561,800) (337,172)
Deferred revenue (13,601) (20,442)
--------------------- ---------------------
Net cash used in operating activities (1,843,633) (4,100,274)
Investing activities
Purchase of furniture and equipment (66,294) (78,516)
Proceeds from the sale of fixed assets 9,714 -
Investment in Intellibit Corporation - (200,000)
Sales of short-term investments - 4,078,679
Payment for purchase of L&E, net of cash acquired (1,239,995) -
--------------------- ---------------------
Net cash provided by (used in) investing activities (1,296,575) 3,800,163
Financing activities
Proceeds from issuance of common stock 173,563 33,260
Proceeds from notes payable 1,565,000 -
--------------------- ---------------------
Net cash provided by financing activities 1,738,563 33,260
--------------------- ---------------------
Net decrease in cash (1,401,645) (266,851)
Cash and cash equivalents, beginning of period 1,588,790 1,418,770
===================== =====================
Cash and cash equivalents, end of period $ 187,145 $ 1,151,919
===================== =====================
</TABLE>
See accompanying notes
5
<PAGE>
TELEPAD CORPORATION
STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
--------------------- ---------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Actual cash payments for interest $ - $ 214
===================== =====================
Supplemental Schedule of Noncash Investing and Financing Activities
The Company purchased all of the capital stock of L&E Mobile Computer
Mounts, Inc. for $3,266,550. In connection with the acquisition, common
and preferred stock was issued as follows:
Fair value of assets acquired $ 3,266,550 $ -
Cash paid for capital stock (1,300,000) -
--------------------- ---------------------
Common and preferred stock issued $ 1,966,550 $ -
===================== =====================
Issuance of common stock $ 956,700 $ -
Issuance of preferred stock 1,009,850 -
--------------------- ---------------------
Common and preferred stock issued $ 1,966,550 $ -
===================== =====================
</TABLE>
See accompanying notes
6
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information pertaining to the periods ended
September 30, 1998 and 1997 is unaudited.)
1. Organization and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The acquisition of L&E Mobile Computer Mounts, Inc.
("L&E") on May 27, 1998 has been accounted for as a purchase. The financial
statements include the results of operations of L&E since the acquisition date
and all inter-company transactions with L&E have been eliminated through
consolidation. Of the purchase price of $3,267,000, $178,000 was allocated to
L&E's net assets and remainder was allocated to goodwill, which is being
amortized on a straight-line basis over 10 years. At September 30, 1998, the
accumulated amortization of goodwill was $106,000. In the event that additional
consideration is paid to the L&E shareholders, per the terms of the Purchase
Agreement, such additional consideration will be capitalized as additional
purchase price. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended September 30,
1998 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. For further information, refer to the financial
statements for the year ended December 31, 1997 and footnotes thereto included
in the Company's Form 10-KSB.
Net Loss Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share" which established new standards for
computing and presenting net income per share information. As required, the
Company adopted the provisions of Statement 128 in its 1997 financial statements
and has restated net loss per share information for all prior periods. Basic net
loss per share was determined by dividing net loss by the weighted average
number of common shares outstanding during each period. Diluted net loss per
share excludes common equivalent shares, unexercised stock options and warrants
as the computation would not be dilutive. A reconciliation of the net loss
available for common shareholders and number of shares used in computing basic
and diluted net loss per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September
30,
---------------------------------- ------------------------------------
1998 1997 1998 1997
-------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net loss per share $ (527,713) $ (1,149,780) $ (2,976,742) $ (3,775,367)
============== ================ ================ ================
Weighted average shares:
Basic net loss per share -
weighted average shares 13,021,874 11,755,624 12,502,200 11,742,194
Effect of dilutive securities:
Stock options - - - -
Diluted net loss per share -
-------------- ---------------- ---------------- ----------------
adjusted weighted average shares 13,021,874 11,755,624 12,502,200 11,742,194
============== ================ ================ ================
Basic net loss per share $ (0.04) $ (0.10) $ (0.24) $ (0.32)
============== ================ ================ ================
Diluted net loss per share $ (0.04) $ (0.10) $ (0.24) $ (0.32)
============== ================ ================ ================
</TABLE>
7
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Stockholders' Equity
During the first quarter of 1998, 310,000 shares of Class A common
stock were issued to seven officers and directors of the Company who elected to
receive shares of common stock in lieu of a portion of their 1998 salaries or
board fees in the aggregate amount of $155,000. The shares were valued at $.50
per share, which was the closing price on the date of issuance. The cost was
deferred and is being amortized over the period of performance of services in
1998.
On May 27, 1998, the Company, as part of the purchase of L&E, issued
950,000 shares of a new series of preferred stock designated Series C 7%
Cumulative Redeemable Convertible Preferred Stock, having a liquidation
preference of $1.00 per share, ("Preferred Shares") and 900,000 shares of Class
A common stock. The Preferred Shares are redeemable, at the Company's option, at
a redemption price payable in cash equal to the liquidation preference and all
accrued but unpaid dividends thereon. Pursuant to the Certificate of
Designations by which the Preferred Shares were created, each Preferred Share is
convertible into one share of Common Stock, upon approval of such conversion
(the "Conversion Proposal") by the holders of a majority of the outstanding
Common Stock voted thereon in person or by proxy at an annual or special meeting
(the "First Meeting"), or a subsequent annual or special meeting (the "Second
Meeting"). The Company is required to convene the First Meeting, and if
necessary the Second Meeting, to seek shareholders approval of the Conversion
Proposal, no later than the 210th day following the closing of the L&E purchase
transaction on May 27, 1998. The Company believes that such First Meeting will
not be able to be conveved on or before the time required, but intends to
convene such meeting as soon as possible. The Company intends to seek an
extension of such time from the L&E Shareholders, but if unsucessful, will be in
violation of its obligations under the Pledge Agreements regarding such special
meeting (see Note 2. Acquisition). If the Conversion Proposal is approved, the
950,000 Preferred Shares will be converted into 950,000 shares of Common Stock
(subject to certain anti-dilution adjustments).
On September 10, 1998, the Company entered into a consulting contract
with Milan Capital Group, Inc. to provide investor relations services to the
Company. In addition to cash payments required under this agreement, the Company
agreed to issue 450,000 fully vested warrants, which do not contain any
penalties for non-performance, to purchase 450,000 shares of Common Stock, at
exercise prices ranging from $0.781 per share to $3.00 per share, with a
weighted average exercise price of $1.868 per share. The fair value of these
warrants, which was capitalized and is being amortized over the period in which
the consulting services are performed, is estimated as $141,000 on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions: dividend yield 0%, volatility of 106%, risk-free interest rate of
4.25%, and expected life of 2 years.
2. Acquisition
On May 27, 1998, the Company pursuant to a Share Purchase Agreement
dated as of May 27, 1998 (the "Purchase Agreement"), acquired from Christine
LeMaire and Dean N. Eisenberger (collectively the "L&E Shareholders"), all of
the outstanding capital stock of L&E Mobile Computer Mounts, Inc. ("L&E"). L&E
is a distributor, installer and integrator of vehicle mounted mobile computers,
and a distributor and manufacturer of mobile mounting products. At closing,
among other things, the Company paid a total of $1,300,000 in cash to the L&E
Shareholders ("Cash Consideration") and issued to them a total of (a) 900,000
shares of its Class A Common Stock, par value $.01 per share (the "Common Stock
Consideration"), and (b) 950,000 shares, having a liquidation preference of
$1.00 per share, of a new series of preferred stock designated Series C 7%
Cumulative Redeemable Convertible Preferred Stock ("Preferred Shares"). The
Company is obligated to pay an additional sum (the "Additional Consideration")
to the L&E Shareholders, within a specified number of days after the earlier of:
(i) the third anniversary of the closing under the Purchase Agreement (the
"Closing"); (ii) the date on which any event included in the definition of
"Acceleration Event" occurs (including specified changes in control of the
Company and certain other extraordinary events regarding the Company or L&E);
and (iii) at the Company's option, on an earlier date (the "Additional
Consideration Payment Date"). The amount of the Additional Consideration will be
based on either (a) a formula using a multiple of L&E's average annual
"stand-alone" earnings before interest, taxes, depreciation and amortization and
certain other expenses (as described in the Purchase Agreement) from the Closing
to the Additional Consideration Payment Date, or (b) at the
8
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Company's option, the present value on the Additional Consideration Payment
Date, of $20,000,000 discounted from the third anniversary of the Closing,
assuming a discount rate of 8.5% per annum. As a condition to the Closing, as a
capital contribution, the Company concurrently issued a non-recourse $333,000
note payable to L&E, initially bearing interest at a rate of 6% per annum
through maturity, which was July 27, 1998, and thereafter at the lesser of (i)
the rate of 12 percent (12%) per annum or (ii) the highest interest rate
permitted by applicable law (the "Note"). The Company, L&E and the L&E
Shareholders have entered into a series of negotiations concerning the possible
termination of the Note and amendment of the provisions of the Purchase
Agreement relating to additional capital investments in L&E to be made by the
Company. There is no assurance that the above-mentioned negotiations will result
in an agreement to amend the Purchase Agreement. If no such agreement of
amendment is reached, the Company would intend to repay the Note.
Pursuant to the Certificate of Designations by which the Preferred
Shares were created, each Preferred Share is convertible into one share of
Common Stock, upon approval of such conversion (the "Conversion Proposal") by
the holders of a majority of the outstanding Common Stock voted thereon in
person or by proxy at an annual or special meeting (the "First Meeting"), or a
subsequent annual or special meeting (the "Second Meeting"). The Company is
required to convene the First Meeting, and if necessary the Second Meeting, to
seek shareholders approval of the Conversion Proposal, no later than the 210th
day following the Closing. The Company believes that such First Meeting will not
be able to be conveved on or before the time required, but intends to convene
such meeting as soon as possible. The Company intends to seek an extension of
such time from the L&E Shareholders, but if unsucessful, will be in violation of
its obligations under the Pledge Agreements regarding such special meeting. If
the Conversion Proposal is approved, the 950,000 Preferred Shares will be
converted into 950,000 shares of Common Stock (subject to certain anti-dilution
adjustments).
Subject to The Company's right to redeem or purchase such shares,
failure of the Preferred Shares to convert into Common Stock on or prior to the
210th day following the Closing would constitute an event of default under the
pledge agreements between the Company and the L&E Shareholders as discussed
below (the "Pledge Agreements"), and, as a result, the L&E Shareholders would
have a right to foreclose upon the L&E capital stock acquired by the Company
from the L&E Shareholders (the "L&E Stock") commencing on the 271st day
following the Closing. The L&E Shareholders and the Investors (defined below)
have agreed to vote all Common Stock held by such persons in favor of the
Conversion Proposal.
Dividends, payable annually in cash will begin to accrue on the
Preferred Shares commencing on the earlier of January 1, 2000 and the date on
which the Second Meeting is held if at such meeting shareholder approval of the
Conversion Proposal is not obtained. At any time before, on or after the
dividend commencement date, the Company may at its option redeem, in whole or in
part, the Preferred Shares at a redemption price equal to their liquidation
preference plus, if the redemption date occurs after the dividend commencement
date, accrued and unpaid dividends thereon to the redemption date.
The Common Stock Consideration and the Preferred Shares are subject to
certain purchase and sale obligations pursuant to the Purchase Agreement.
Specifically, commencing 90 days following the Closing, each L&E Shareholder
shall have the right to cause the Company to purchase any part, or all, of the
Common Stock Consideration and the Preferred Shares (including all Common Stock
into which such shares may be converted), at a purchase price of $0.38 per share
(the "Put Rights"). The earliest date on which the Put Rights shall terminate is
the 300th day from the Closing, and the latest date is the first anniversary of
the Closing. However, if the Common Stock comprising the Common Stock
Consideration and, if the Conversion Proposal is approved, Common Stock issued
upon conversion of the Preferred Shares are subject to a registration statement
effective under the Securities Act of 1933 as amended (the "Securities Act"),
the Put Right shall terminate on the later to occur of the 300th day after the
Closing and the date such registration statement first becomes effective. If the
Company fails to file such a registration statement on or before the 210th day
following the Closing an event of default will occur under the Pledge
Agreements, entitling the L&E Shareholders to foreclose upon the L&E Stock as
discussed above.
In addition to its rights to redeem the Preferred Shares under the
Certificate of Designations, the Company has certain repurchase rights under the
Purchase Agreement (the "Call Rights"). The Call Rights
9
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
entitle the Company, from time to time, following notice to the L&E Shareholders
or either L&E Shareholder, (a) commencing on the Closing Date, and expiring on
the 210th day following the Closing, to repurchase up to 450,000 Preferred
Shares (or Common Stock if such L&E Shareholder or L&E Shareholders, as the case
may be, no longer owns any Preferred Shares) at a purchase price of $0.50 per
share; and (b) if the Conversion Proposal is not approved on or prior to the
210th day following the Closing, commencing on such 210th day, and expiring 60
days thereafter, to repurchase up to an additional 500,000 Preferred Shares at a
purchase price of $1.00 per share.
The L&E Shareholders will continue to comprise the senior management of
L&E pursuant to employment agreements with L&E executed at the Closing. Pursuant
to the Purchase Agreement, until the Additional Consideration is paid, (a) the
L&E Shareholders will have the right to nominate three of the five L&E
directors, which three nominees the Company is obligated to elect, and (b) the
Company's board of directors is obligated to appoint one of the L&E Shareholders
to the existing vacant seat on the Company's board of directors, and to nominate
such person as a director.
Until the Additional Consideration has been paid, no dividend or
distribution in respect of the L&E Stock shall be paid or made to the Company,
except L&E is obligated to pay a dividend at the end of each fiscal quarter, in
respect of the L&E Stock in an aggregate amount equal to the Estimated Tax
Payment. Estimated Tax Payment means (a) 25% of L&E's estimated "stand alone"
tax liability for the then current tax year, less (b) with respect to the
initial tax year in which a change in L&E's method of accounting from "cash
basis" to "accrual basis" occurs, the increase in L&E's estimated "stand alone"
tax liability, if any, incurred solely as a result of such change in accounting
method, to the fullest extent that funds are legally available for declaration
of such dividends.
Pursuant to separate Pledge Agreements, the Company granted security
interests in the L&E Stock to L&E and the L&E Shareholders to secure the
Company's obligations (a) to pay the Note; (b) to pay the Additional
Consideration; (c) to pay the above-discussed additional capital contributions
to L&E; (d) to register the Common Stock of the L&E Shareholders under the
Securities Act; (e) to satisfy the Put Rights, and (f) to nominate as a Company
director a designee of the L&E Shareholders ("Secured Obligations"). The
Company's liability in respect of the Secured Obligations is limited to the
right of each L&E Shareholder to foreclose upon the L&E Stock which such L&E
Shareholder sold to the Company pursuant to the Purchase Agreement. However, as
a condition to each L&E Shareholder's right to foreclose upon L&E Stock prior to
the first anniversary of the Closing, he or she must transfer to the Company
475,000 Preferred Shares; provided, however, if such L&E Shareholder owns fewer
than 475,000 Preferred Shares, including as a result of the exercise of Put or
Call Rights or redemption rights, then any shortfall shall be satisfied by such
L&E Shareholder by transferring an equal number of shares of Common Stock.
Under the Purchase Agreement, regardless of whether a default under the
Pledge Agreements has occurred, the Company is entitled at any time to assign
and transfer 50% of the L&E Stock to one L&E Shareholder and the 50% balance of
the L&E Stock to the other L&E Shareholder, in complete satisfaction of all of
the Secured Obligations and in such event the Company shall not have any
personal or direct obligation or liability for payment, satisfaction or
otherwise in respect of the Secured Obligations. Also, the Company does not have
any personal or direct obligation or liability in respect of the Secured
Obligations except in respect of foreclosure against the L&E Stock as provided
in the Pledge Agreements.
The Company obtained $1,000,000 of the Cash Consideration through a
portion of the proceeds realized on May 27, 1998 from the Company's private sale
of convertible notes in the aggregate principal amount of $1,500,000 (the
"Investor Notes"), to the following private investors: Ellis Enterprises LTD,
Beeston Investments LTD, The Hewlett Fund, Inc., Investcor LLC, Austrot Anstalt
Schaan, Balmore Funds S.A., and The Gross Foundation, Inc. (collectively, the
"Investors"). The Company also issued to certain placement agents warrants to
purchase 200,000 shares of Common Stock, at an exercise price of $0.98 per
share, subject to certain anti-dilution and other adjustment provisions
contained therein (the "Warrants"). The fair value of the Warrants,
10
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
which was capitalized and is being amortized on a straight-line basis over the
life of the note, is estimated as $124,000 on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: dividend
yield 0%, volatility of 106%, risk-free interest rate of 4.25%, and expected
life of 2 years. The exercise price was determined through arms-length
negotiation between the parties. Each Investor Note bears interest at a rate of
8% per annum, matures on the first anniversary of the Closing, and is
convertible, in $25,000 increments, at the discretion of the holder into Common
Stock from time to time until the principal balance and all unpaid interest on
such Investor Note is paid in full (the "Conversion Date") at a specified per
share conversion price subject to certain anti-dilution and other adjustments.
The Company has issued into escrow 1,500,000 shares of Common Stock reserved for
delivery to the Investors in the event of the conversion of the Investor Notes.
The issuance of any additional shares (in excess of such 1,500,000 shares) by
the Company to the Investors with respect to the conversion of the Investor
Notes and the issuance of the Put Notes (if any), or to certain placement agents
upon exercise of the Warrants, is subject to prior approval of the Company's
shareholders. The conversion price will be $0.98 per share if the conversion
occurs within the first 120 days following the Closing, and thereafter if the
average closing bid price for the Common Stock on the NASDAQ SmallCap Market, or
any other securities exchange or securities market on which the Common Stock is
then traded for any five consecutive days is less than $1.31, then the
conversion price per share will be the lesser of (i) 75% of the average closing
bid price of the Common Stock on the NASDAQ SmallCap Market, or any other
securities exchange or securities market on which the Common Stock is then
traded, for the five consecutive trading days immediately preceding the
Conversion Date, or (ii) $0.98. The Company has granted the Investors, a
security interest in all of the Company's assets, other than the L&E Stock, to
secure the Investor Notes. The Investors have subordinated their security
interest in the Company's assets in favor of liens in connection with
non-convertible debt financing by the Company, but up to a maximum prior lien of
$1,000,000.
Pursuant to its obligations under the subscription agreement by which
the Investors purchased the Investor Notes (the "Subscription Agreement"), the
Company filed with the Securities and Exchange Commission ("SEC") Registration
Statement (No. 333-57795) on Form S-3 (the "Registration Statement") covering
all of the Common Stock issuable upon exercise of the Warrants, and 20,000
shares of Common Stock for each $10,000 of aggregate principal amount of the
Investor Notes (the "Investor Shares"), and the Common Stock issuable upon
conversion of the Put Notes (described below). Such Registration Statement
became effective on July 10 1998, resulting in $300,000 of the $1,500,000
purchase price of the Investor Notes being released to the Company, which funds
had been held in escrow pursuant to agreement between the Company and the
Investors.
Pursuant to the Subscription Agreement, if certain conditions
precedent had been satisfied, as described below, the Investors would have been
obligated to purchase from the Company convertible notes (the "Put Notes") in
the aggregate principal amount of $1,000,000, if the Company had exercised such
right during the 45-day period commencing 30 days after the effective date of a
registration statement covering the Investor Shares ("Put Period"). The
Investors' obligation to purchase the Put Notes was contingent on, among other
things, the timely obtainment of the exemption from NASDAQ's corporate
governance rules or the approval of its shareholders of the issuance of the
Investor Shares upon conversion of the Investor Notes, the Put Notes, and
exercise of the Warrants. The Company did not satisfy this condition precedent
and the Investors are no longer obligated to purchase the Put Notes.
Upon the occurrence of certain events ("Investor Acceleration Events"),
(i) the interest rate under the Investor Notes is subject to increase from 8%
per annum to 16% per annum, and (ii) all sums of principal and interest then
remaining unpaid under the Investor Notes and all other amounts payable
thereunder, shall be immediately due and payable, at the holders option, all
without demand, presentment or notice, or grace period. Investor Acceleration
Events include, among other things, the failure of the Company to obtain, within
60 days of Closing, the approval of its shareholders required pursuant to
NASDAQ's corporate governance rules to allow conversion of the Investor Notes
and exercise of all the Warrants and conversion of the Put Notes, but only to
the extent of the Investor Notes that may not be converted due to the Company's
failure to obtain such shareholder approval. As of the 170th day following
Closing, the Company has not obtained such shareholder approval. The
11
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Investors have indicated to the Company their intention to convert a portion of
the Investor Notes (no Put Notes have been issued as of such date).
3. Pro Forma Information
The unaudited pro forma combined condensed statements of operations
gives effect to the acquisition of L&E Mobile Computer Mounts, Inc. ("L&E"),
completed by the Company on May 27, 1998, as if it had occurred at January 1,
1998 and January 1, 1997, respectively.
Nine Months Ended September 30,
1998 1997
----------------- -----------------
Pro forma Pro forma
Revenue $ 7,705,599 $ 4,754,898
Net loss available to
common shareholders $(3,162,178) $(3,677,886)
================= =================
Basic and diluted loss per share $ (0.24) $ (0.29)
================= =================
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
- ---------------------
For the quarter ended September 30, 1998, total revenues increased 98%
to $2,592,000 from $1,308,000 recorded in the same period in 1997. The revenue
increase is the net result of $2,063,000 in revenue from the addition of L&E
Mobile Computer Mounts, Inc. ("L&E"), which was acquired in a purchase
transaction on May 27, 1998, and a $779,000 decrease in revenue from the sale of
TelePad products and services. Product revenue contributed by L&E was $2,004,000
while TelePad product revenue declined by $934,000. The Company continues to
experience delays in securing significant orders for TelePad 3 computers. L&E
contributed $59,000 in service revenue and TelePad service revenue increased by
$154,000 (169%) in the quarter. For the first nine months of 1998, total
revenues increased $2,077,000, or 75%, from $2,786,000 in the same period in
1997. L&E added combined product and service revenue of $3,408,000, but this was
partially offset by a $1,331,000 decline in TelePad revenue due primarily to a
reduced number of shipments of TelePad 3 computers in the first nine months of
1998 compared to the nine months of 1997. Service revenue increased 376% in the
first nine months compared to the same period in 1997 due to the addition of
$65,000 in L&E service revenue and an increase of $398,000 in TelePad service
revenue due to an increase in awards of service contract work.
Cost of products and services sold during the three months ended
September 30, 1998 totaled $1,941,000 (75% of revenue) compared to $1,289,000
(99% of revenue) in the same period in 1997. L&E's cost of products was
$1,365,000 and the cost of services was $69,000 in this period. For the first
nine months of 1998, the cost of products and services sold was $3,927,000 (81%
of revenue) compared with $2,651,000 (95% of revenue) in the comparison period.
For the nine month period, L&E's cost of products was $2,432,000 and the cost of
services was $96,000. The second quarter of 1998 includes a $41,000 charge to
cost of goods sold to recognize the loss in value of inventory held for future
production. Gross margin percentages in the third quarter of 1998 improved from
the same period in 1997 primarily as a result of the addition of L&E, but they
were offset partially by a $13,000 negative gross margin on service contracts
resulting primarily from the reversal of service contract revenue in the second
quarter of 1998. Improving competitive computer technology continues to put
downward margin pressure on the TelePad 3 computer sales.
Research and development ("R&D") expenses for the third quarter of 1998
were $62,000 compared to $155,000 for the same period in 1997. This 60% decrease
in R&D spending in the quarter ended September 30, 1998 and a 59% reduction in
the first nine months compared to the prior period reflects a shift from work on
developing the 586 microprocessor version of the TelePad 3 and modules for the
TelePad 3 in the prior period to a reduced level of work on designing the next
version of the TelePad 3 in the current period.
Selling, general and administrative ("SG&A") expenses for the quarter
ended September 30, 1998 decreased $95,000 (8%) from the same period in 1997.
This was the net result of the addition of $238,000 in L&E SG&A expenses, a
$410,000 decrease in TelePad SG&A expenses, and the addition of amortization of
goodwill related to the acquisition of L&E of $77,000. For the nine month
period, SG&A expenses increased $95,000, or 3% from the same period in 1997.
This increase was primarily the net result of a $337,000 (10%) reduction in
TelePad SG&A expenses, the addition of $326,000 in L&E selling, general and
administrative expenses, and the addition of $106,000 in amortization of
goodwill related to the acquisition of L&E.
Interest income in the third quarter of 1998 was $3,000 compared to
$127,000 in the comparison period. This reflects a reduced invested
cash-equivalents caused by the use of cash in operations. For the nine month
period, interest income was $22,000 compared to $290,000 in the comparison
period also reflecting reduced invested cash-equivalents caused by the use of
cash in operations. Interest expense increased $82,000 in the current quarter
and $109,000 in the nine month period, primarily as a result of the notes
payable related to the acquisition of L&E.
13
<PAGE>
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.
The Company's current product the TelePad 3 is not presently year 2000 compliant
in that the TelePad 3 computer's date does not automatically roll over to the
correct date in the year 2000. However, it is possible to manually reset to the
correct date. The Company is in discussions with the software vendor that
provided the software which provides the date function and based upon these
discussions believes that the necessary modification is feasible and that the
cost to modify the code will not be material. There can be no assurance that the
Company will be able to implement the necessary changes in an efficient and
timely manner or that such changes will be effective in automatically rolling
over the date to the correct date in the year 2000.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1998, the Company's cash and cash equivalents was
$187,000, a $1,402,000 decrease from the prior year-end balances. Net cash used
in operating activities was $1,844,000 in the nine-month period ended September
30, 1998 as compared to $4,100,000 in the comparable period in 1997. Net cash
used in operating activities in both periods was primarily due to the net losses
incurred in each respective period. Accounts receivable decreased by a net
amount of $709,000 in the current period based on reduced TelePad 3 computer
sales offset partially by an increase in L&E receivables. In the prior period
revenue exceeded collections resulting in a $1,444,000 use of cash. Inventory
increased $872,000 on a net basis in the current quarter due primarily to the
delivery of nearly completed TelePad 3 computer kits from Sanmina Corporation
("Sanmina"), the Company's contract manufacturer. The increase in inventory due
to the addition of computer kits was partially offset by an $82,000 decrease in
L&E's inventory. The increase in inventory was partially financed by a
$1,286,000 draw down of advances by Sanmina, which advances had been made in
1997 against open purchase orders for inventory. Accounts payable and accrued
expenses decreased by $562,000 in the nine-month period ended September 30, 1998
due primarily to a $474,000 reduction in L&E accounts payable.
In the nine-month period ended September 30, 1998, cash used in
operating activities was partially funded by the proceeds from the issuance of
notes payable issued in connection with the L&E purchase transaction whereas in
the prior period cash used in operating activities was primarily funded by a
reduction in short-term investments.
On May 27, 1998, the Company, pursuant to a Share Purchase Agreement
dated as of May 27, 1998 (the "Purchase Agreement"), acquired from Christine
LeMaire and Dean N. Eisenberger (collectively the "L&E Shareholders"), all of
the outstanding capital stock of L&E Mobile Computer Mounts, Inc. ("L&E"). L&E
is a distributor, installer and integrator of vehicle mounted mobile computers,
and a distributor and manufacturer of mobile mounting products. At closing,
among other things, the Company paid a total of $1,300,000 in cash to the L&E
Shareholders ("Cash Consideration") and issued to them a total of (a) 900,000
shares of its Class A Common Stock, par value $.01 per share (the "Common Stock
Consideration"), and (b) 950,000 shares, having a liquidation preference of
$1.00 per share, of a new series of preferred stock designated Series C 7%
Cumulative Redeemable Convertible Preferred Stock ("Preferred Shares"). The
Company is obligated to pay an additional sum (the "Additional Consideration")
to the L&E Shareholders, within a specified number of days after the earlier of:
(i) the third anniversary of the closing under the Purchase Agreement (the
"Closing"); (ii) the date on which any event included in the definition of
"Acceleration Event" occurs (including specified changes in control of the
Company and certain other extraordinary events regarding the Company or L&E);
and (iii) at the Company's option, on an earlier date (the "Additional
Consideration Payment Date"). The amount of the Additional Consideration will be
based on either (a) a formula using a multiple of L&E's average annual
"stand-alone" earnings before income taxes, depreciation and amortization (as
defined in the Purchase Agreement) from the Closing to the Additional
Consideration Payment Date, or (b) at the Company's option, the present value on
the Additional Consideration Payment Date, of $20,000,000 discounted from the
third anniversary of the Closing, assuming a discount rate of 8.5% per annum. As
a condition to the Closing, as a capital contribution, the Company concurrently
issued a non-recourse $333,000 note payable to L&E, which bears interest at a
rate of 6% per annum, and which matures 60 days following the Closing (the
"Note"). The Company is obligated to make
14
<PAGE>
additional capital contributions to L&E of $333,000 on May 27, 1999 and $334,000
on May 27, 2000. The Company, L&E and the L&E shareholders have entered into a
series of negotiations concerning the possible termination of the Note and
amendment of the provisions of the Purchase Agreement relating to additional
capital investments in L&E to be made by the Company.
The Company obtained $1,000,000 of the Cash Consideration through a
portion of the proceeds realized on May 27, 1998 from TelePad's private sale of
convertible notes in the aggregate principal amount of $1,500,000 (the "Investor
Notes"). The Company also issued to certain placement agents warrants to
purchase 200,000 shares of Common Stock, at an exercise price of $0.98 per
share, subject to certain anti-dilution and other adjustment provisions
contained therein. Each Investor Note bears interest at a rate of 8% per annum,
matures on the first anniversary of the issue date, and is convertible, in
$25,000 increments, at the discretion of the holder into Common Stock from time
to time until the principal balance and all unpaid interest on such Investor
Note is paid in full at a specified per share conversion price subject to
certain anti-dilution and other adjustments.
Upon the occurrence of certain events ("Investor Acceleration Events"),
(i) the interest rate under the Investor Notes is subject to increase from 8%
per annum to 16% per annum, and (ii) all sums of principal and interest then
remaining unpaid under the Investor Notes and all other amounts payable
thereunder, shall be immediately due and payable, at the holders option, all
without demand, presentment or notice, or grace period. Investor Acceleration
Events include, among other things, the failure of the Company to obtain, within
60 days of Closing, the approval of its shareholders required pursuant to
NASDAQ's corporate governance rules to allow conversion of the Investor Notes
and exercise of all the Warrants and conversion of the Put Notes, but only to
the extent of the Investor Notes that may not be converted due to the Company's
failure to obtain such shareholder approval. As of the 170th day following
Closing, the Company has not obtained such shareholder approval. The Investors
have indicated to the Company their intention to convert a portion of the
Investor Notes (no Put Notes have been issued as of such date).
On February 27, 1998, the Company was notified by The Nasdaq Stock
Market, Inc. ("Nasdaq") that the market price for Class A Common Stock ("Common
Stock") does not meet the quantitative maintenance requirements for minimum bid
price and the Company is therefore subject to being delisted from the Nasdaq
SmallCap Market if this situation is not remedied by May 28, 1998, which time
may be extended through the review process. On June 1, 1998 the Company was
notified by Nasdaq that the market price for Common Stock was again in
compliance with closing bid requirement for continued listing on The Nasdaq
Stock Market. On July 30, 1998 Company was again notified by Nasdaq that the
market price for Common Stock does not meet the quantitative maintenance
requirements for minimum bid price and the Company is therefore subject to being
delisted from the Nasdaq SmallCap Market if this situation is not remedied by
October 30, 1998, which time may be extended through the review process. On
October 30, 1998, the Company requested a hearing on this matter.
On September 1, 1998, the Company was notified by Nasdaq that, based
upon a review of the Company's public filings and market data, the Company fails
to meet any one of the three quantitative requirements for continued listing of
the Common Stock Nasdaq SmallCap Market (the "Quantitative Requirements"), which
include (a) net tangible assets of $2 million, (b) market capitalization of $35
million, or (c) net income of $500,000 in the most recently completed fiscal
year or two of the last three most recently completed fiscal years. The Company
must satisfy al least one of the three Quantitative Requirements, in addition to
satisfying the Minimum Share Price Requirement, to avoid delisting. The Company
has submitted a proposal to Nasdaq, which requires additional financing to
implement, and which the Company believes will enable it to satisfy at least one
of the Quantitative Requirements, although there is no assurance that such plan
will be successful or acceptable to Nasdaq or that the required additional
financing which is necessary to implement the proposal will be available at all
or on terms that are acceptable to the Company.
The Company's existing capital resources, consisting primarily of cash,
short-term investments have continued to be eroded by the continued use of funds
in operations. Future operations are heavily dependent upon the TelePad 3
computer being competitive in the market and the Company's ability to sell the
existing
15
<PAGE>
TelePad 3 inventory, failure of which could have a material adverse effect on
the financial condition of the Company. In the event that the Company's internal
estimates relating to its anticipated sales, 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 will most likely
require substantial additional financing at such time. The Company has no
established banking relationships and no available line of credit. However, the
Company has established a financial arrangement with a finance company that
provides for advances against assigned invoices which assists in leveraging its
working capital. L&E's established banking relationships and line of credit are
restricted to use within L&E and are not otherwise available to the Company as a
source of liquidity. The Company may seek to further 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 and private offerings. There can be no
assurance as to the availability or terms of any required additional financing,
when and if needed. 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.
"Safe Harbor" Statement under the private Securities Litigation Reform
Act of 1995: The statements above which are not historical facts are
forward-looking statements that involve risks and uncertainties, including, but
not limited to, demand for the Company's products and market acceptance risks,
the effect of economic conditions, the impact of competitive products and
pricing, product development, commercialization and technological difficulties,
capacity, and supply constraints or difficulties, the results of financing
efforts, possible delisting of securities by Nasdaq, the risk of low-priced
stock, and other risks detailed in the Company's Securities and Exchange
Commission filings. Although the Company believes that the expectations
reflected in the forward-looking statements are reasonable at this time, it can
give no assurances that such expectations will prove to have been correct.
Actual results could differ materially based on a number of factors including,
but not limited to the facts set forth above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - 27.1 Financial Data Schedule
(b) Reports on Form 8-K
On June 11, 1998, the Company filed a Form 8-K that reported under item
2 the acquisition of L&E Mobile Computer Mounts, Inc. on May 27, 1998.
On August 10, 1998, the Company filed a Form 8-K/A that updated the
information reported under item 2 relating to the acquisition of L&E Mobile
Computer Mounts, Inc. on May 27, 1998 and also provided the financial
information required by item 7.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TELEPAD CORPORATION
Date: November 16, 1998 /s/ DONALD W. BARRETT
------------------------- -----------------------------------------
Donald W. Barrett
Chairman of the Board and Chief
Executive Officer
Date: November 16, 1998 /s/ ROBERT D. RUSSELL
------------------------- -----------------------------------------
Robert D. Russell
Vice President, Secretary and Treasurer
Principal Financial and Accounting Officer
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