SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended MARCH 31, 1998.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-21934
TELEPAD CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 52-1680936
- ------------------------------- ---------------------------------
(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
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Former name, former address and former fiscal year, if
changed since last report.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 ninety days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date:
SHARES OUTSTANDING
CLASS OF COMMON STOCK AT MAY 8, 1998
--------------------- --------------
Class A Common Stock 12,121,874 shares, $0.01 par value
Class B Common Stock none
Transitional Small Business Disclosure Format (check one):
Yes [_] No [X]
<PAGE>
TELEPAD CORPORATION
INDEX TO FORM 10-QSB
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - March 31, 1998 (unaudited)
and December 31, 1997 3
Statements of Operations for the three-month periods
ended March 31, 1998 (unaudited) and 1997 (unaudited) 4
Statements of Cash Flows for the three-month periods
ended March 31, 1998 (unaudited) and 1997 (unaudited) 5
Notes to Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
2
<PAGE>
TELEPAD CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 724,260 $ 1,588,790
Accounts receivable, less allowance of $95,000
at March 31, 1998 and $88,000 at December 31, 1997 1,128,757 1,419,231
Inventory 2,288,510 1,174,507
Advance to Sanmina -- 1,286,284
Other current assets 207,839 184,133
------------ ------------
Total current assets 4,349,366 5,652,945
Furniture and equipment:
Office furniture and equipment 211,474 203,140
Computer equipment 685,117 668,378
------------ ------------
896,591 871,518
Less accumulated depreciation (533,275) (489,895)
------------ ------------
Net furniture and equipment 363,316 381,623
Investment in Intellibit 200,000 200,000
Deposits and other assets 23,730 23,591
------------ ------------
Total assets $ 4,936,412 $ 6,258,159
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,831,731 $ 2,309,680
Deferred revenue 13,601 13,601
------------ ------------
Total current liabilities 1,845,332 2,323,281
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,
12,065,624 and 11,755,624 shares issued and outstanding
at March 31, 1998 and December 31, 1997, respectively 120,656 117,556
Class B common stock, 593,063 shares designated,
no shares issued or outstanding -- --
Additional paid-in capital 39,435,513 39,283,613
Accumulated deficit (36,465,089) (35,466,291)
------------ ------------
Total stockholders' equity 3,091,080 3,934,878
------------ ------------
Total liabilities and stockholders' equity $ 4,936,412 $ 6,258,159
============ ============
</TABLE>
See accompanying notes
3
<PAGE>
TELEPAD CORPORATION
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
1998 1997
------------ ------------
(UNAUDITED) (UNAUDITED)
Revenues:
TelePad products $ 457,390 $ 489,361
Service contracts 215,771 32,331
------------ ------------
Total revenues 673,161 521,692
Costs and expenses:
Cost of goods sold - Telepad products 404,549 435,047
Cost of goods sold - service contracts 110,138 13,417
Research and development 143,248 306,290
Selling, general and administrative 1,026,518 1,142,275
------------ ------------
Total costs and expenses 1,684,453 1,897,029
------------ ------------
Loss from operations (1,011,292) (1,375,337)
Interest income 14,082 97,182
Other income (expense) (1,588) --
------------ ------------
Net loss $ (998,798) $ (1,278,155)
============ ============
Net loss per share $ (0.08) $ (0.11)
============ ============
Diluted net loss per share $ (0.08) $ (0.11)
============ ============
Weighted average shares outstanding 12,044,513 11,716,982
============ ============
See accompanying notes
4
<PAGE>
TELEPAD CORPORATION
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
1998 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net loss $ (998,798) $(1,278,155)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 45,203 63,254
Provision for loss on accounts receivable 6,732 (3,558)
Loss on disposal of property and equipment 2,552 --
Changes in assets and liabilities:
Accounts receivable 283,742 280,977
Inventory (1,114,003) (806,459)
Advance to Sanmina 1,286,284 --
Other current assets (23,706) 129,417
Deposits and other assets (139) --
Accounts payable and accrued expenses (477,949) (481,764)
Deferred revenue -- (13,489)
----------- -----------
Net cash used in operating activities (990,082) (2,109,777)
INVESTING ACTIVITIES
Purchase of furniture and equipment (29,448) --
Sales of short-term investments -- 1,941,121
----------- -----------
Net cash (used in) provided by investing activities (29,448) 1,941,121
FINANCING ACTIVITIES
Net cash proceeds from issuance of common stock 155,000 32,760
----------- -----------
Net cash provided by financing activities 155,000 32,760
----------- -----------
Net decrease in cash and cash equivalents (864,530) (135,896)
Cash and cash equivalents, beginning of period 1,588,790 1,418,770
----------- -----------
Cash and cash equivalents, end of period $ 724,260 $ 1,282,874
=========== ===========
See accompanying notes
5
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE PERIODS ENDED
MARCH 31, 1998 AND 1997 IS UNAUDITED.)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31, 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:
6
<PAGE>
THREE MONTHS ENDED MARCH 31,
1998 1997
------------ ------------
Net loss per share $ (998,798) $ (1,278,155)
============ ============
Weighted average shares:
Basic net loss per share -
weighted average shares 12,044,513 11,716,982
Effect of dilutive securities:
Stock options -- --
Warrants -- --
============ ============
Diluted net loss per share -
adjusted weighted average shares 12,044,513 11,716,982
============ ============
Basic net loss per share $ (0.08) $ (0.11)
============ ============
Diluted net loss per share $ (0.08) $ (0.11)
============ ============
Options to purchase approximately 2.0 million shares and 1.8 million
shares of common stock with exercise prices ranging between $.33 and $7.88 per
share were outstanding during the first quarter of 1998 and 1997, 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 the first quarter of 1998 and 1997,
respectively, but were not included in the computation of diluted net loss per
share because the effect would be antidilutive.
Stockholders' Equity
During the first quarter of 1998, 310,000 shares of Class A common stock
were issued to seven officers and directors of the Company who elected to
receive shares of common stock in lieu of a portion of their salaries or board
fees.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
- ---------------------
For the quarter ended March 31, 1998, TelePad revenues increased 29% to
$673,000 from $522,000 recorded in the same quarter in 1997. The change is the
net result of relatively equivalent levels of product revenue in each period and
an increase in revenue from service contracts.
The change in product revenue is the net result of fewer unit shipments
of TelePad 3 computers and lower prices, but increased shipments of accessories
and related products. Service contract revenue increased nearly 7 times the
$32,000 generated in the comparison quarter. This revenue relates to consulting
work for the telecommunications and health care industries.
The gross margin in the current quarter increased to 24% from 14% in
the comparison quarter primarily as a result of the shift in revenue mix toward
service revenue, on which higher gross margins were earned. Cost of products
sold during the three months ended March 31, 1998 totaled $405,000 (89% of
related revenue) compared to $435,000 (89% of related revenue) in the same
period in 1997.
Research and development ("R&D") expenses for first quarter of 1998
were down 53% from the same quarter in 1997. This reduction in R&D spending
reflects a shift from work on developing the 586 microprocessor version of the
TelePad 3 and work on developing modules for the TelePad 3 in the prior period
to work on designing the next version of the TelePad 3 in the current period.
Selling, general and administrative expenses for the quarter ended
March 31, 1998 decreased $115,000, from the same period in 1997. The decrease in
costs was primarily the net result of a general reduction in costs partially
offset by an increase in indirect costs related to the increase in services
business.
Interest income in the first quarter of 1998 was $14,000 compared to
$97,000 in the same period in 1997. This reflects a reduction in invested cash
equivalent balances due primarily to the use of cash in operations.
Liquidity and Capital Resources
- -------------------------------
Net cash used in operating activities was $990,000 in the quarter ended
March 31, 1998 as compared to $2,110,000 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
$284,000 in the current period based on collections of outstanding receivables.
Inventory increased $1,114,000 on a net basis in the current quarter due
primarily to the delivery of nearly completed TelePad 3 computer kits from the
Company's contract manufacturer Sanmina Corporation ("Sanmina"). The increase in
inventory was financed by the $1,286,000 draw down of advances by Sanmina, which
advances had been made in 1997 against open purchase orders for inventory.
"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
8
<PAGE>
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 factors set forth above.
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 - None
9
<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: MAY 14, 1998 /S/ DONALD W. BARRETT
------------ ---------------------------
Donald W. Barrett
Chairman of the Board and
Chief Executive Officer
Date: MAY 14, 1998 /S/ ROBERT D. RUSSELL
------------ ---------------------------
Robert D. Russell
Vice President, Secretary
and Treasurer Principal
Financial and Accounting
Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000892038
<NAME> TELEPAD CORPORATION
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 724,260
<SECURITIES> 0
<RECEIVABLES> 1,128,757
<ALLOWANCES> 95,000
<INVENTORY> 2,288,510
<CURRENT-ASSETS> 4,349,366
<PP&E> 896,591
<DEPRECIATION> (533,275)
<TOTAL-ASSETS> 4,936,412
<CURRENT-LIABILITIES> 1,845,332
<BONDS> 0
0
0
<COMMON> 120,656
<OTHER-SE> 3,091,080
<TOTAL-LIABILITY-AND-EQUITY> 4,936,412
<SALES> 457,390
<TOTAL-REVENUES> 673,161
<CGS> 404,549
<TOTAL-COSTS> 514,687
<OTHER-EXPENSES> 1,169,767
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (998,799)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (998,799)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
