SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER: 0-14836
TELEGEN CORPORATION
(Exact name of Registrant as Specified in its Charter)
CALIFORNIA
(State or other jurisdiction of
incorporation or organization)
84-067214
(I.R.S. Employer Identification No.)
101 SAGINAW DRIVE
REDWOOD CITY, CA 94063
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (650) 261-9400
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (S)229.405 of this chapter) is not contained herein,
and will not 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-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately $1,933,742.30 as of February
13, 1998, based upon the closing sale price on the Electronic Bulletin Board for
that date.
There were 8,236,216 shares of the Registrant's Common Stock issued and
outstanding as of February 13, 1998.
Telegen Corporation
Annual Report on Form 10-K
Table of Contents
PART I
ITEM 1. BUSINESS OF TELEGEN........................................ 1
ITEM 2. DESCRIPTION OF PROPERTY.................................... 8
ITEM 3. LEGAL PROCEEDINGS.......................................... 8
PART II
ITEM 5. MARKET FOR COMMON EQUITY................................... 8
ITEM 6. SELECTED FINANCIAL DATA.................................... 10
ITEM 7. TELEGEN MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 11
ITEM 8. FINANCIALS & SUPPLEMENTARY DATA............................ 19
ITEM 9. TELEGEN CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..................... 19
PART III .................................................................. 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K ............................................... 20
SIGNATURES
TELEGEN CORPORATION
ITEM 1. BUSINESS OF TELEGEN
Telegen Corporation ("Telegen" or the "Company") is a high technology
company with products in development in the flat panel display market. At
present, Telegen is organized into one active subsidiary and one inactive
subsidiary. Telegen Display Laboratories, Inc. ("TDL"), a California corporation
and a controlled second tier subsidiary of the Company, has developed a low-
cost flat panel display technology to compete with other types of flat panel
displays. Telegen Communications Corporation ("TCC"), a California corporation
and a wholly-owned subsidiary of the Company, formerly developed, manufactured
and marketed a line of internet products and intelligent telecommunications
which provide additional features to existing telephone equipment used by
consumers and small businesses. All of the assets of TCC were sold on April 1,
1998. Morning Start Multimedia Inc., a New Jersey Corporation ("MSM"), was a
wholly-owned subsidiary of the Company until it was sold on December 31, 1997.
MSM is a creator and supplier of interactive CD-ROM and internet-based
edutainment, infotainment and entertainment programs and software. Telegen's
corporate offices are located at 101 Saginaw Road, Redwood City, CA 94063, (650)
261-9400.
Telegen was incorporated in California on August 30, 1996. This
corporation was formed to acquire Telegen Communications Corporation, formerly
known as Telegen Corporation, and Solar Energy Research Corp., a publicly held
shell corporation. In the year ending December 31, 1997, certain significant
developments occurred. On October 31, 1997 the Company's Board of Directors
terminated its three top executives and appointed Fred Y. Kashkooli as acting
Chief Executive Officer. On December 31, 1997 the Company completed its sale of
MSM. In return for all the capital stock of MSM, Telegen received $200,000, plus
certain future royalties. As a subsequent event, on April 1, 1998, the Company
sold substantially all of its assets in TCC. In consideration for such sale, the
Company received (i) a total of $500,000, including $350,000 in cash and
$150,000 in a promissory note, (ii) certain future royalties, and certain TCC
liabilities were assumed by the purchasing entity.
Telegen Display Laboratories, Inc.
Flat Panel Display Technology. Telegen has developed a proprietary flat
panel technology which represents a major departure from the current product
offerings on the market today. The Company believes that such technology has
visual characteristics and potentially relative ease of manufacturing and low
costs that could enable Telegen to become a significant participant in the
display business.
Telegen expects its proprietary flat panel display technology to
compete favorably with existing Active Matrix Liquid Crystal Display ("AMLCD")
technology in terms of resolution, brightness, color, viewing angle, durability
and cost. Telegen also believes a second generation of its technology, to be
developed in the future, could be manufactured in large scale at a significantly
lower cost than AMLCD and other flat panel technologies. Primary differences
between the Telegen
flat panel display and a good quality CRT monitor include its reduced thickness
and weight, lower operating cost, higher reliability and potentially brighter
presentation. Telegen believes that these features make its display desirable
for many products in the industry.
Telegen believes that its flat panel technology exceeds the performance
of active matrix liquid crystal displays, or AMLCDs, which are currently the
premium laptop computer display and cost the consumer significantly more than
the monochromatic displays and low performing, passive color displays. The
Telegen technology has been fabricated in 10.5" diagonal, full color, full gray
scale prototypes which run a standard NTSC (television standard) signal from a
video tape. Additionally, high brightness test cells have been constructed in
the next step of development for a more advanced and potentially lower cost
display.
Telegen believes that its flat panel technology has substantial value.
Telegen is in active discussion with several prospective partners to obtain
substantial new capital in the form of either equity investment in Telegen, a
new joint venture company or project financing, which Telegen will need to
develop plant and product specifications, and to build a pilot production
facility. TDL's initial research and development facilities are located in
Silicon Valley and it plans to license the manufacturing of the display into a
broad range of display markets in order to facilitate the quickest possible
market acceptance.
Telegen plans to establish a prototype production line in new
facilities in 1998 which could produce a limited number of displays per year,
and build a full scale production plant (one million displays per year capacity)
in 1999/2000 with the proceeds from future funding. Further, in 1996 Telegen
sold a 10% equity interest in TDL to a joint venture investment group based in
Singapore for an investment in TDL. Along with the investment, the joint venture
has an option to acquire licenses to build four plants, each with the capacity
to produce one million flat panel displays per year. If all options are
exercised the total license fees for these plants will be $40 million, plus
royalties. On January 7, 1998, the Singapore based joint venture investment
group (the "Plaintiffs") filed a complaint (the "Complaint") in Superior Court,
San Mateo County, against the Company and certain named directors. The Company
believes that the Complaint is without merit and intends to vigorously defend
such matter. To the extent the Plaintiffs were to succeed in this matter,
Telegen's results of operations and financial condition would be materially
adversely affected (See Item 3. Legal Proceedings).
Display Patents and Manufacturing. In December 1995, Telegen filed for
its first U.S. patent (of an estimated total of seven) on the basic Telegen
technology with broad claims covering displays targeting the entertainment,
computer, automotive and military markets. The Company expects this patent to
protect its proprietary techniques for building highly cost effective flat panel
displays without the use of high-tech semiconductor facilities. A second,
similarly based patent was filed in December, 1996 and a third patent was filed
in March, 1997. Although it is difficult to precisely project the capital costs
for establishing a high volume manufacturing facility, Telegen's initial
estimates indicate the display business entry cost utilizing its technology
could be significantly lower than other competitive emerging technologies.
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Flat Panel Market. The flat panel display market today generates
approximately $17 billion in sales and is predicted by industry sources to grow
to greater than $20 billion by the year 2000. Since Telegen anticipates that its
display may cost less than an equivalent AMLCD display, Telegen expects to have
a significant competitive advantage in a number of the flat panel display
markets.
Telegen's comparisons of its technology costs versus AMLCD costs are
drawn from the current known market costs of AMLCD products readily available on
the market today, as compared with Telegen's estimates of its costs. Telegen's
costs are derived from a careful analysis of (i) the cost of components and
materials, most of which come from specific bids from suppliers, (ii) estimates
of the cost to purchase manufacturing equipment (some of which already have been
bid) to be amortized and charged as a cost of the product, and (iii) the
estimate of labor and other overhead costs required for each step of the
manufacturing process. The labor estimates are derived from the actual
experience Telegen has gained from assembly of prototypes in the past.
Flat Panel Competition. The market for information displays is highly
competitive, and the Company expects this to continue. Telegen believes there is
currently no comparable flat panel display with the potential low cost, full
color, gray scale and other attributes of its technology available commercially
from any other source in volume. The standard flat panel displays currently
available are Passive Matrix LCD and AMLCD. These displays are manufactured in
high volume by a number of Japanese companies, including Toshiba, Hitachi, NEC
and Sharp Electronics. The largest commonly available AMLCD full color screens
are 14" diagonal and cost from $15-$17 per square inch to manufacture.
Several Japanese companies have recently introduced color plasma driven
liquid crystal display ("LCD") flat panel displays of 40" diagonal size which
are available in the U.S. for about $8,000 retail. Full-color plasma screens
which are not in any volume production yet, lack good gray scale and are
estimated to cost upwards of $20-$30 per square inch to manufacture.
Additionally, a number of companies, including Micron Technologies,
Inc. and Candescent, Inc., are developing a technology known as Field Emission
Display (FED). Displays based upon the FED technology are not expected to be
available in volume until the end of the decade and are expected to cost between
$12-$15 per square inch.
The Telegen technology in volume production is expected to sell for
under $5.00 per square inch. Telegen believes that pricing at this level, if
achieved, will give it a competitive advantage, assuming the cost of competing
technologies cannot also be reduced to these levels. No assurances can be given
that these manufacturing costs can ever be achieved.
The market for Telegen's products is characterized by rapid
technological change and evolving industry standards and is highly competitive
with respect to timely product innovation. The introduction of products
embodying new technology and the emergence of new industry standards can render
existing products obsolete and unmarketable. Telegen's success will be dependent
in part upon its ability to anticipate changes in technology and industry
standards and to successfully develop and introduce new and enhanced products on
a timely basis. If Telegen is unable to do so,
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Telegen's results of operations will be materially adversely affected. With
regard to its flat panel display technology, there are other more developed and
accepted flat panel display technologies already in commercial production which
will compete with Telegen's technology. The Company has finished the development
of a completed "proof of concept" of the current generation of its flat panel
display technology. The Company believes it can successfully scale its flat
panel display technology to 10.5 inch diagonal displays. At present, the Company
does not believe that scalability of this generation of its technology beyond
such levels is feasible. However, the Company does have preliminary design
concepts for a second generation of its technology which might provide
additional scalability. There can be no assurance that Telegen will be
successful in the development of its flat panel technology or that Telegen will
not encounter technical or other serious difficulties in its development,
commercialization or volume manufacturing which would be materially adverse to
Telegen's results of operations.
The market for flat panel displays is dominated by major Japanese
companies such as Sharp Electronics, Toshiba and Sony. Telegen expects this
competition to continually increase. There can be no assurance that Telegen will
be able to compete effectively against its competitors, many of whom may have
substantially greater financial resources than Telegen. Flat panel displays
manufactured utilizing AMLCD technology have been in production for almost 10
years and have proven market acceptance. New technologies, such as FED and Color
Plasma, are in development by a number of potential competitors, most, if not
all, of whom have greater financial resources than Telegen. Telegen does not own
or lease a manufacturing facility for, and has not begun the process of, volume
manufacturing of flat panel displays. There can be no assurance that Telegen's
unique flat panel technology can compete successfully on a cost or display
quality basis with these other technologies. Further, there can be no assurance
that Telegen's efforts to obtain patent protection for its unique flat panel
technology will be successful or, if patent protection is obtained, that
Telegen's patent(s) will provide adequate protection.
Morning Star Multimedia, Inc.
MSM develops computer software in the following areas: entertainment
CD-ROMs, personal productivity software and movie and recording industry
CD-ROMs. MSM also develops Internet web site content for major corporations and
provides multimedia development services. MSM has developed interactive CD-ROM
multimedia software relating to the "Casper" movie by Steven Spielberg based
upon an adventure through Whipstaff Manor. MSM also developed and released in
early 1998, an interactive CD/ROM featuring Kristi Yamaguchi. Additionally,
scheduled for release in 1998 is similar software relating to the "Swan
Princess" movie which will feature games and activities using actual scenes and
backgrounds from original hand-painted animation cells. MSM has also developed
"Plan and Track" software for Weight Watchers/(R)/ which will simplify and
virtually eliminate the need for tedious paper record keeping and nutritional
planning by helping the dieter plan and track meals with easily produced
computerized text records and charted and graphed records. MSM is developing
another software product for Weight Watchers/(R)/ which is similar to the plan
and track software, but is based upon the newly revamped Weight Watchers/(R)/
system, with more user-friendly graphical icon driven operations.
-4-
MSM Sale. On December 31, 1997 Telegen sold all of the stock in MSM to
its founders for $200,000 in cash plus certain royalties on certain MSM products
for a period of two years.
Telegen Communications Corporation
Telegen Communication Corporation, formerly known as Telegen
Corporation, was organized in May, 1990, for the purpose of designing,
developing, manufacturing and marketing a line of telephone accessory products
for the consumer and small business markets.
The telephone equipment market is a long-standing, well-established
industry. The basis of the industry has historically been the telephone itself.
In the late 1970's, however, a market for telephone peripheral equipment began
to develop because of the invention of the microprocessor chip and deregulation
of the industry. This new peripherals market expanded rapidly and today consists
of designer and specialty telephones, including full-feature and cordless
telephones, cellular telephones, telephone answering machines, FAX machines and
computer modems. This condition in the market has created a business opportunity
for the marketing of Telegen's ACS and MLD to automatically re-route the
appropriate calls to a long distance carrier without additional effort by the
caller, saving the caller money and giving the long distance carriers new
business.
TCC develops, manufactures and markets a line of intelligent
telecommunications products, providing enhanced features to existing telephone
equipment and services for consumers and small businesses. In 1991, TCC
introduced its initial telecommunications product, telephone call restrictor
known as "TeleBlocker", to provide consumers and small businesses with the
ability to restrict outgoing telephone usage in order to control costs. In 1995
- - 1996 TCC developed a line of telephone dialers, known as "Automated Carrier
Selector", to give users the ability to automatically reroute outgoing calls to
alternative long distance companies. TCC products incorporate a proprietary
technology known as "Parallel Technology", which allows one device, plugged
anywhere on a telephone line, to control all instruments on the line regardless
of location and with no requirement for re-wiring.
All of TCC's programmable products utilize a proprietary technology
known as the Remote Programming System ("RPS"). RPS is a combination of
communications hardware, protocols and automated computer systems which enable
TCC's Customer Service Representatives to directly service and program any TCC
product over the telephone line when a customer calls for assistance on the
toll-free Customer Service line.
TCC was granted a very broad (60 claim) patent covering its proprietary
telecom technologies on December 31, 1996. These technologies embody two
especially valuable capabilities known as "Remote Programming System" and
"Parallel Control."
TCC telecom products are currently being manufactured in Hong Kong and
The People's Republic of China by Crystal Field Ltd., a local small manufacturer
who meets TCC's specifications for quality.
All of the assets of TCC were sold to SynerCom, Inc., a Nevada
corporation ("Synercom") organized by a group of investors led by Frederick T.
Lezak, Jr., an executive officer and director of
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the Company, on April 1, 1998 for $500,000, including $350,000 in cash and
$150,000 in the form of an eighteen (18) month promissory note, the assumption
of certain wage, tax and other liabilities, and certain royalties on certain
assets sold for a period of three (3) years.
Telegen Research and Development
Telegen's research and development expenses for the years ending
December 31, 1997, 1996 and 1995 were approximately $4,400,036, $2,386,331 and
$842,026 respectively. Telegen estimates that its total expenditures for
research and development will aggregate at least $4,000,000 for the flat panel
display during 1998. Telegen Display Laboratories portion of 1997 and 1996
research and development which totaled about $2,687,840 and $1,416,540,
respectively, was equipment and related overhead costs. In 1997 and 1996,
Telegen's research and development activities included work toward the
development of MSM and TCC products. In 1995 and prior thereto, substantially
all of the Company's research and development expenses were attributable to
TCC's products. Continued development of the flat panel display technology will
continue to represent significant capital expenditures in the Company's near
term.
Telegen's strong emphasis on new product and technology research and
development will command management's primary attention through 1998 and much of
1999. It will also comprise the primary use of Telegen's financial resources for
these periods. The market for Telegen's products is characterized by rapid
technological change and evolving industry standards and is highly competitive
with respect to timely product innovation. The introduction of products
embodying new technology and the emergence of new industry standards can render
existing products obsolete and unmarketable. Telegen's success will be dependent
in part upon its ability to anticipate changes in technology and industry
standards and to successfully develop and introduce new and enhanced products on
a timely basis. If Telegen is unable for technological or other reasons to
develop products in a timely manner in response to changes in the industry or if
products or product enhancements that Telegen develops do not achieve market
acceptance, Telegen's results of operation will be materially adversely
affected. Telegen has experienced delays in its development of its flat panel
display technology.
Telegen Intellectual Property
Telegen has acquired all rights to the underlying technologies embodied
in its product lines from the founders of Telegen or has developed such
intellectual property internally. Telegen routinely files for both United States
and foreign patents on its technologies. Telegen believes, based upon the advice
of patent counsel, that patent protection may be available to Telegen on
substantial portions of its technologies.
Telegen Display Laboratories filed its first very broad and basic US
patent on the flat panel display in December 1995, its second in December 1996,
its third in March 1997 and plans to file several more key patents on a
continuing basis.
-6-
Additionally, Telegen believes it retains copyright protection for the
software used in its products as well as for its integrated circuit designs. It
is the policy of Telegen to aggressively protect, through all appropriate means,
all of its legal rights to its technologies.
Telegen relies on a combination of patents, trade secret and other
intellectual property law, nondisclosure agreements and other protective
measures to protect its rights pertaining to its products. Such protection,
however, may not preclude competitors from developing products similar to
Telegen's products. In addition, the laws of certain foreign countries do not
protect Telegen's intellectual property rights to the same extent as do the laws
of the United States. Although Telegen continues to implement protective
measures and intends to defend its proprietary rights vigorously, there can be
no assurance that these efforts will be successful.
Regulatory Matters
Federal law requires that all products which connect with the public
telephone system must comply with Federal Communications Commission ("FCC")
Rules Part 68, as amended. Before such products are sold, they must be tested
for compliance by an accredited independent testing laboratory and the test
results must be submitted to the FCC. The manufacturer then receives an FCC
Registration number which must be displayed on each product. To the Company's
knowledge, up to the sale of substantially all of TCC's assets, TCC has been
compliant with all FCC requirements for its telecommunications products.
Employees
Telegen currently employs 18 persons on a full-time basis, including two
executive officers, 6 senior scientists and a general support staff. Telegen
believes that its relationship with its current employees is satisfactory.
Telegen's future success will depend in significant part upon the continued
service of certain key technical and senior management personnel, and Telegen's
continuing ability to attract, assimilate and retain highly qualified technical,
managerial and sales and marketing personnel. Competition for such personnel is
intense.
Telegen has entered into agreements with each of its executive officers
(as well as all other full-time employees) that prohibit disclosure of
confidential information to anyone outside of Telegen both during and subsequent
to employment and require disclosure and assignment to Telegen of all
proprietary rights to any ideas, discoveries or inventions relating to or
resulting from the officer's work for Telegen.
Telegen has limited marketing experience and expanding Telegen's
markets will require significant expenses, including additions to personnel.
There can be no assurance that Telegen will have all the capital resources
necessary to expand its sales and marketing operations, or that Telegen's
attempts to expand its sales and marketing efforts will be successful.
-7-
ITEM 2. DESCRIPTION OF PROPERTY
Telegen maintains its corporate offices at 101 Saginaw Drive, Redwood
City, California, 94063. Also located at this address are Telegen's subsidiaries
Telegen Communications Corporation and Telegen Display Laboratories, Inc.
The facilities include 38,000 square feet of office space at a net cost
of approximately $52,000 per month, including Telegen's respective share of the
building's operating expenses. As part of the asset purchase agreement for the
sale of all of the assets of TCC by and between Telegen and Synercom dated April
1, 1998, the Company is subleasing 2,500 square feet of its facilities to
Synercom, rent free until the earlier of (i) December 31, 1998 or (ii) Telegen's
vacating of such facilities. Telegen believes that there is adequate space
available in its location for expansion, but there can be no assurance that
additional space necessary to support its future requirements can be located on
favorable terms or that Telegen will not incur significant expenses if it has to
obtain additional facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company and its Telegen Display Laboratories Inc. subsidiary
("TDL") are named defendants in a complaint (the "Complaint") filed January 7,
1998 in Superior Court, San Mateo County, filed by IPC Corporation, Ltd.,
Transtech Electronics, PTE, LTD., and IPC Transtech Display PTE, LTD
(collectively, the "Plaintiffs"). The Complaint alleges that the Company
committed material misrepresentations when the Company sold TDL Common Stock to
the Plaintiffs for $5,000,000 on May 30, 1996. Additional named defendants
include Jessica L. Stevens, Warren M. Dillard, Bonnie Crystal, and William J.P.
Weiland, all former officers of the Company. The Plaintiffs seek recision of the
original purchase, complete restitution of the $5,000,000, interest, punitive
damages, costs and attorneys' fees. Neither the Company nor TDL has been served
with the Complaint and no action has been initiated against the Company beyond
filing the Complaint. The Company believes that the Complaint is without merit
and intends to vigorously defend such matter. To the extent the Plaintiffs were
to succeed in this matter, Telegen's results of operations and financial
condition would be materially adversely affected.
PART II
ITEM 5. MARKET FOR COMMON EQUITY
The Company currently trades its stock on the over-the-counter
Electronic Bulletin Board (the "EBB"). The EBB is a real-time electronic
quotation service for over-the-counter securities. The EBB is not an automated
quotation system and is characterized by low volume of trading. There is no
assurance that the EBB can or will provide sufficient liquidity to holders of
the Company's Common Stock. The Company was trading on the Nasdaq SmallCap
Market until January 22, 1998 and intends to return to it as soon as it meets
the listing and maintenance requirements. On February 22, 1998, Nasdaq raised
such listing and maintenance requirements. There can be no assurance that
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trading on the EBB will provide investors with sufficient liquidity for the
purchase and sale of the Common Stock or that the Company will be able to meet
the higher Nasdaq SmallCap Market ("SmallCap") listing and maintenance
requirements that have been in effect since February 22, 1998, in the near
future, or if at all, or that if the Company does meet the SmallCap requirements
that a broad trading market will develop in the Common Stock.
The following table sets forth the quarterly high and low closing
prices of the Company's Common Stock from October 28, 1996 through December 31,
1997. Such prices represent prices between dealers, do not include retail
mark-ups, mark-downs or commissions and may not represent actual transactions.
High Low
*Fourth Quarter 1996 . . . . . . . . . . . . $19.00 $10.50
First Quarter 1997 . . . . . . . . . . . . $20.25 $6.00
Second Quarter 1997 . . . . . . . . . . . . $8.37 $2.93
Third Quarter 1997 . . . . . . . . . . . . $3.50 $2.12
Fourth Quarter 1997 . . . . . . . . . . . . $2.56 $0.56
*Active trading in Telegen Corporation Common Stock began on October
28, 1996 upon the completion of the Company's merger with and into a
dormant public shell company, Solar Energy Research Corp., a Colorado
corporation.
As of April 13, 1998, there were approximately 2,981 holders of record
of the Company's Common Stock. The Company believes that a significant number of
beneficial owners of its Common Stock hold shares in street name. No dividends
were paid to Telegen's Common Stock shareholders during the last fiscal year and
Telegen does not anticipate paying dividends in the future.
-9-
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Financial Statements and Notes thereto and other financial
information included elsewhere in this report.
Years Ended December 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- ----------- ---------- ---------- --------
STATEMENT OF OPERATIONS DATA
Revenues
Sales $ 463,486 $ 23,700 $ 145,795 $ 432,972 $ 498,358
Services 574,916 517,356 0 0 0
Total Revenues 1,038,402 541,056 145,795 432,972 498,358
Cost of Revenues
Sales 234,292 18,083 170,421 314,239 296,285
Services 93,793 68,612 0 0 0
Total Cost of Revenues 328,085 86,695 170,421 314,239 296,285
Gross Profit 710,317 454,361 (24,626) 118,733 202,073
Operating Expenses
Sales and marketing 1,368,767 439,350 89,275 92,170 29,980
Research and development 4,400,036 2,386,331 842,026 830,913 37,955
General and administrative 5,553,209 3,043,530 1,506,531 1,118,312 294,526
Total operating expenses 11,322,012 5,869,211 2,437,832 2,041,395 362,461
Income (loss) from operations (10,611,695) (5,414,850) (2,462,458) (1,922,662) (160,388)
Other income (loss), net (109,098) 194,443 725 9,608 3,154
Interest Expense 60,195 146,650 81,105 30,658 11,488
Minority Interest 325,077 252,031 0 0 0
Income (loss) before provision for
Taxes and extraordinary items (10,455,911) (5,115,026) (2,542,838) (1,943,712) (168,722)
Extraordinary gain 536,179 0 0 0 0
Provision for income taxes 0 0 0 0 0
Net income (loss) (9,919,732) (5,115,026) (2,542,838) (1,943,721) (168,722)
Net income (loss) per share (2.01) (1.16) (0.88) (0.70) (0.07)
Shares used in per share calculation 5,547,015 4,418,099 2,882,961 2,785,957 2,294,627
BALANCE SHEET DATA
Working capital (deficit) (2,291,117) 2,702,061 (1,794,634) (390,017) 827,517
Total assets 2,231,614 5,727,322 935,788 566,952 1,398,635
Notes payable and capital lease 500,000 18,549 167,649 178,976 151,090
Obligations less current portion
Accumulated deficit (21,634,728) (10,441,795) (5,326,769) (2,763,931) (840,219)
Shareholders' equity (deficit) (1,469,752) 4,091,163 (1,589,540) (321,485) 381,088
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ITEM 7. TELEGEN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THESE FORWARD LOOKING STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET FORTH UNDER
"FACTORS THAT MAY AFFECT FUTURE RESULTS" IN THIS MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS
REPORT. THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND THE COMPANY'S FINANCIAL STATEMENTS AND NOTES
THERETO INCLUDED ELSEWHERE IN THIS REPORT.
Telegen, through its subsidiary TCC, was organized and commenced
operations in May 1990. From inception until 1993, Telegen was principally
engaged in the development and testing of its telecommunications products.
Telegen's first product sales and revenues were realized in 1991. Revenues in
1991 through 1995 were derived primarily from sales of Telegen's
telecommunications products. In 1996, revenues were derived primarily from the
operations of MSM. In 1997 revenues were derived from the operations of MSM and
TCC. Telegen has incurred significant operating losses in every fiscal year
since its inception, and, as of December 31, 1997, Telegen had an accumulated
deficit of $21,634,728. As of December 31, 1997 Telegen had a working capital
deficit of $2,291,117. Telegen expects to continue to incur substantial
operating losses through 1998. In order to become profitable, Telegen must
successfully develop commercial products, manage its operating expenses,
establish manufacturing capabilities, create sales for its products and create a
distribution capability.
Telegen has made significant expenditures for research and development
of its products. In order to become competitive in a changing business
environment, Telegen must continue to make significant expenditures in these
areas. Therefore, Telegen's operating results will depend in large part on
development of a revenue base.
Results of Operations
Revenues. Revenues for 1997 were $1,038,402 compared to $541,056 for
1996, and $145,795 for 1995. 1997 revenues consisted of $574,916 of MSM revenues
from software services under contract and product sales and $463,486 of TCC
revenues. TCC revenues in 1997 included a $300,000 final payment under MCI
contracts with the remainder from product sales. 1996 revenues consisted
primarily of Morning Star Multimedia revenues of $517,356 from software services
under contract. The remaining $23,700 of 1996 revenues consisted of TCC product
sales. Prior to 1996 all revenues were derived from TCC product sales. 1995 TCC
revenues consisted primarily of sales of the ACS 2000.
-11-
TCC's Teleblocker product which made up the bulk of revenues for the first half
of 1995 was taken off the market in June of 1995 for redesign. The redesigned
Teleblocker product was returned to the market in the spring of 1997.
Cost of Goods Sold. Cost of goods sold and contract services was
$328,085 for the year ended December 31, 1997, $86,695 for the year ended
December 31, 1996 and $170,421 for the year ended December 31, 1995. Cost of
goods sold for 1997 consisted of $93,793 for revenues derived from MSM and
$234,292 for revenues derived from TCC. Cost of goods sold for 1996 consisted of
$68,612 for revenues derived from MSM and $18,083 for revenues derived from TCC.
Prior to 1996 all cost of goods sold was related to TCC product sales. TCC's
cost of goods sold for 1995 included a $22,377 charge to write off obsolete
inventory. Excluding this write off, cost of goods sold for 1996 and 1995 were
consistent with revenues from the same periods.
Research and Development. Research and development expenses were
$4,400,036 for the year ended December 31, 1997, $2,386,331 for the year ended
December 31, 1996, and $842,026 for the year ended December 31, 1995. Increased
research and development expenses for 1997 resulted from a full year of
operation of the research facility in TDL and expansion of research and
development activities for MSM and TCC; of the 1997 research and development,
$2,687,840 were attributable to TDL, $1,088,337 were attributable to MSM and
$623,859 were attributable to TCC. Increased research and development expenses
for 1996 resulted from the establishment of a full scale research facility in
TDL and research and development expenses of MSM; of the 1996 research and
development expenses, $1,416,540 were attributable to TDL, $279,175 were
attributable to MSM and $690,616 were attributable to TCC. Of the 1995 research
and development expenses, $15,042 was attributable to MSM and $826,984 was
attributable to TCC. Lower expenses for TCC in 1996 were the result of
completion of development of the ACS product.
Sales and marketing. Sales and marketing expenses for the year ended
December 31, 1997 were $1,368,767 compared with $439,350 for the year ended
December 31, 1996, and $89,275 for the year ended December 31, 1995. Of the 1997
sales and marketing expenses $516,000 was attributable to TDL, $95,949 was
attributable to MSM and $756,818 was attributable to TCC/Telegen Corporation.
Approximately 51% of the sales and marketing expenses attributable to TDL and
TCC/Telegen Corporation were related to participation in the Consumer
Electronics Show in Las Vegas in January of 1997. Of the 1996 sales and
marketing expenses, $14,711 was attributable to TDL, $149,618 was attributable
to MSM, and $275,021 was attributable to TCC and Telegen Corporation. Of the
1995 sales and marketing expenses, $4,808 was attributable to MSM and $275,021
was attributable to TCC. The increase in sales and marketing expenses for 1996
not related to TDL or MSM were related to increases in marketing staff, creation
of new marketing materials, public relations costs related to Telegen as a
public company, and costs related to the Consumer Electronics show in January
1997.
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General and Administrative. General and Administrative expenses for
1997 were $5,553,209 as compared with $3,043,470 for 1996, and $1,506,531 for
1995. Of the 1997 general and administrative expenses $368,791 were attributable
to TDL, $807,723 were attributable to MSM and $4,376,695 were attributable to
TCC and Telegen Corporation. Of the 1996 general and administrative expenses
$306,901 were attributable to TDL, $265,855 were attributable to MSM and
$2,470,714 were attributable to TCC and Telegen Corporation. Of the 1995 general
and administrative expenses, $5,062 was attributable to MSM and $1,501,469 was
attributable to TCC. Increases in TCC and Telegen Corporation in 1997 were
related to legal and consulting fees associated with patent activity, increased
staffing and a full year of occupancy at its larger facility, and increased
legal and accounting fees related to SEC compliance. The increase in general and
administrative expenses not related to TDL or MSM for 1996 as compared to 1995
were related to legal and consulting fees associated with patent activity, legal
and accounting fees related to the merger, the amortization of bridge loan
expenses and the relocation of Telegen to a new and larger facility. The primary
components of general and administrative expenses for 1995 were employee
salaries and legal and accounting expenses.
Interest Income and Expense. Net interest income for 1997 was $60,195
as compared with net interest income of $47,793 for 1996, and net interest
expense of $80,380 for 1995. Of the 1997 interest income and expense TDL
contributed $18,754 of interest income and no interest expense, MSM contributed
no interest income and $6,719 of interest expense, and TCC and Telegen
Corporation contributed $10,415 of interest income and $14,645 of interest
expense. Of the 1996 interest income and expense TDL contributed $94,112 of
interest income and no interest expense, MSM contributed no interest income and
$8,864 of interest expense, and TCC and Telegen Corporation contributed $100,331
of interest income and $137,786 of interest expense. Decreases in interest
income for 1997 for TDL were the result of decreasing balances in interest
bearing accounts. Increases in interest expense for TCC and Telegen Corporation
for 1997 resulted from decrease in interest bearing accounts and amortization of
the discount related to the conversion feature on the $500,000 Convertible
Promissory Notes issued by Telegen in November 1997. Increases in interest
income for 1996 as compared with 1995 for TDL, TCC and Telegen Corporation were
the result of increased interest bearing deposits on account following private
placements of stock. Increases in interest expenses for TCC and Telegen
Corporation for 1996 were the direct result of bridge loan expenses; the bridge
loans were paid off in May 1996 from the proceeds of a private placement
completed in April 1996. This increase in interest expense for 1996 was offset
by a negative interest expense for TCC and Telegen Corporation for the third
quarter of 1996 as a result of a one-time adjustment, a reduction of interest
expense in the amount of $83,798, reflecting a settlement with Bank Sadarat
$100,000 which was significantly less than the combined principal and accrued
interest that the Company had recorded on its books.
Liquidity and Capital Resources
Telegen has funded its operations primarily through private placements
of its equity securities with individual and institutional investors. As of
December 31, 1997, Telegen had raised $15,559,966 in net capital through the
sale of Telegen Common Stock, and $4,605,010 in net capital through the sale of
TDL common stock. Telegen completed in March 1997 a private placement of a new
Series A Convertible preferred stock which resulted in $2.9 million in net
proceeds to Telegen. Prior to the end of 1997 all shares of the new Series A
Convertible preferred stock had been converted into the Company's Common Stock.
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In May 1996, Telegen formed Telegen Display Laboratories, Inc. ("TDL"),
a subsidiary organized for the development and commercialization of it's unique
flat panel display technology. Shortly after TDL's formation, IPC-Transtech
Display Pte. Ltd. ("IPC-Transtech"), a Singapore-based joint venture company,
acquired a 10% equity interest in TDL for a net investment in TDL of $4,600,000.
Along with its investment in TDL, IPC-Transtech acquired an option to purchase
licenses to build up to four flat panel display production plants.
Due to the unavailability of cash resources for operations, Telegen
issued 58,799 shares of common stock, 57,330 shares of common stock, 119,252
shares of common stock and common stock equivalents during 1997, 1996 and 1995,
respectively, in lieu of cash as payment for certain operating expenses, and
primarily legal fees and employee services, amounting to $252,174, $265,954,
and $596,200, respectively.
Telegen's current working capital is very limited. The Company has a
limited amount of readily available funds to cover immediate working capital
needs such as employee wages, wage taxes, social security taxes, and lease
payments. Furthermore, the Company currently has tax debts associated with
federal and state wage withholding taxes and social security taxes in the amount
of $350,000. Under the Agreement to sell the assets of TCC, the purchasers of
TCC assumed $100,000 of such liabilities. To meet such immediate working capital
needs, the Company will need to raise immediate funds, whether through the sale
of the Company's assets or through attracting immediate financing. There can be
no assurance that the Company will be able to obtain such funding on acceptable
terms, or if at all to meet its immediate capital demands. If adequate funds are
not available as required, Telegen will not be able to continue operations.
Assuming Telegen can obtain adequate short-term capital, Telegen's
future capital requirements will depend upon many factors, including the extent
and timing of acceptance of Telegen's products in the market, the progress of
Telegen's research and development, Telegen's operating results and the status
of competitive products. Additionally, Telegen's general working capital needs
will depend upon numerous factors, including the progress of Telegen's research
and development activities, the cost of increasing Telegen's sales, marketing
and manufacturing activities and the amount of revenues generated from
operations. Although Telegen believes it will obtain significant additional
funding through 1998, there can be no assurance that Telegen will be able to
obtain such funding or that it will not require additional funding, or that any
additional financing will be available to Telegen on acceptable terms, if at all
to meet its capital demands through 1998. If adequate funds are not available as
required, Telegen's results of operations will be materially adversely affected.
Telegen believes it requires substantial capital to complete development of a
finished prototype of the flat panel display technology, and that additional
capital will be needed to establish a high volume production capability. There
can be no assurance that any additional financing will be available to Telegen
on acceptable terms, if at all. If adequate funds are not available as required,
Telegen's results of operations from the flat panel technology will be
materially adversely affected.
Telegen does not have a final estimate of cost nor the funds available
to build a full scale production plant for the flat panel display and will not
be able to build this plant without securing significant additional capital.
Telegen plans to secure these funds either (1) from a large joint
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venture partner who would then be a co-owner of the plant or (2) through a
future public or private offering of stock. Even if such funding can be
obtained, which cannot be assured, it is currently estimated that a full scale
production plant could not be completed and producing significant numbers of
flat panel displays before late 1999. However, Telegen is currently
contemplating entering into license agreements with large enterprises, such as
IPC-Transtech, to manufacture the displays. The manufacturers would also have
the attributes of established manufacturing expertise, distribution channels to
assure a ready market for the displays and established reputations, enhancing
market acceptance. Further, Telegen would benefit from front-end license fees
plus ongoing royalties for income. However, Telegen does not currently expect to
have any such manufacturing license agreements in place before June 1998, or any
significant production of displays thereunder before late 1999.Telegen is
currently planning a limited production/prototype line which will have the
capacity to manufacture a limited number of marketable displays to produce
moderate revenues. The cost of that production line is estimated to be about $5
million.
Telegen's future capital infusions will depend entirely on its ability
to attract new investment capital based on the appeal of the inherent attributes
of its technology and the belief that that technology can be developed and taken
to profitable manufacturing in the foreseeable future. Efforts are currently
being made with parties with substantial resources to conclude such capital
formation. Such capital formation efforts are intended to infuse $20 million
over a period of two (2) years, including $5 million for a prototype plant.
Telegen's actual working capital needs will depend upon numerous
factors including the progress of Telegen's research and development activities,
the cost of increasing Telegen's sales, marketing and manufacturing activities
and the amount of revenues generated from operations, none of which can be
predicted with certainty.
Telegen anticipates incurring substantial costs for research and
development, sales and marketing activities in 1998. Management believes that
development of commercial products, an active marketing program and a
significant field sales force are essential for Telegen's long-term success.
Telegen estimates that its total expenditures for research and development and
related equipment and overhead costs will aggregate over $4,000,000 during 1998.
Telegen estimates that its total expenditures for sales and marketing will
aggregate over $1,000,000 during 1998. Almost none of such funds outlined above
are presently available to Telegen.
RISK FACTORS
In addition to the other information in this Report on Form 10-K, the
following risk factors should be considered carefully in evaluating the Company
and its business:
Telegen's Capital Needs
Telegen's current working capital is very limited. The Company has a
limited amount of readily available funds to cover immediate working capital
needs such as employee wages, wage taxes, social security taxes, and lease
payments. There can be no assurance that the Company will be
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able to obtain such funding on acceptable terms, or if at all to meet its
immediate capital demands. If adequate funds are not available as required,
Telegen will not be able to continue operations. Assuming Telegen can obtain
adequate short-term capital, Telegen's future capital requirements will depend
upon many factors, including the extent and timing of acceptance of Telegen's
products in the market, the progress of Telegen's research and development,
Telegen's operating results and the status of competitive products.
Additionally, Telegen's general working capital needs will depend upon numerous
factors, including the progress of Telegen's research and development
activities, the cost of increasing Telegen's sales, marketing and manufacturing
activities and the amount of revenues generated from operations. Although
Telegen believes it will obtain significant additional funding through 1998,
there can be no assurance that Telegen will be able to obtain such funding or
that it will not require additional funding, or that any additional financing
will be available to Telegen on acceptable terms, if at all to meet its capital
demands through 1998. If adequate funds are not available as required, Telegen's
results of operations will be materially adversely affected. Telegen believes it
requires substantial capital to complete development of a finished prototype of
its flat panel display technology, and that additional capital will be needed to
establish a high volume production capability. There can be no assurance that
any additional financing will be available to Telegen on acceptable terms, if at
all. If adequate funds are not available as required, Telegen's results of
operations from the flat panel technology will be materially adversely affected.
History of Telegen Operating Losses; Accumulated Deficit and Minimum Revenues
Telegen's predecessor, now an operating subsidiary, Telegen
Communications Corporation ("TCC"), was incorporated in 1990 and first shipped
products in 1991. Telegen has been engaged in lengthy development of its
products and has incurred significant operating losses in every fiscal year
since its inception. The cumulative net loss for the period from inception
through December 31, 1997 was $21,634,728. In order to become profitable,
Telegen must increase sales of its existing products, develop, commercialize and
sustain volume manufacturing of its flat panel products, develop new products
for new and existing markets, manage its operating expenses and expand its
distribution capability. There can be no assurance that Telegen will meet and
realize these objectives or ever achieve profitability.
Litigation
The Company and its Telegen Display Laboratories Inc. subsidiary
("TDL") are named defendants in a complaint (the "Complaint") filed January 7,
1998 in Superior Court, San Mateo County, filed by IPC Corporation, Ltd.,
Transtech Electronics, PTE, LTD., and IPC Transtech Display PTE, LTD
(collectively, the "Plaintiffs"). The Complaint alleges that the Company
committed material misrepresentations when the Company sold TDL Common Stock to
the Plaintiffs for $5,000,000 on May 30, 1996. Additional named defendants
include Jessica L. Stevens, Warren M. Dillard, Bonnie Crystal, and William J.P.
Weiland, all former officers of the Company. The Plaintiffs seek recision of the
original purchase, complete restitution of the $5,000,000, interest, punitive
damages, costs and attorneys' fees. Neither the Company nor TDL has been served
with the Complaint and no action has been initiated against the Company beyond
filing the Complaint. The Company believes that the Complaint is without merit
and intends to vigorously defend such matter.
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To the extent the Plaintiffs were to succeed in this matter, Telegen's
results of operations and financial condition would be materially adversely
affected.
Telegen's Exposure to Technological and Market Change; Difficulty in Developing
Flat Panel Technology
The market for Telegen's products is characterized by rapid
technological change and evolving industry standards and is highly competitive
with respect to timely product innovation. The introduction of products
embodying new technology and the emergence of new industry standards can render
existing products obsolete and unmarketable. Telegen's success will be dependent
in part upon its ability to anticipate changes in technology and industry
standards and to successfully develop and introduce new and enhanced products on
a timely basis. If Telegen is unable to do so, Telegen's results of operations
will be materially adversely affected. With regard to its flat panel display
technology, there are other more developed and accepted flat panel display
technologies already in commercial production which will compete with Telegen's
technology. The Company has not finished the development of a completed
prototype of the HGED flat panel display technology. The Company believes it can
successfully scale its HGED flat panel display technology to 10.5 inch diagonal
displays. At present, the Company does not believe that scalability of this
generation of its technology beyond such levels is feasible. However, it does
have preliminary design concepts which would take it to a larger scale. There
can be no assurance that Telegen will be successful in the development of its
flat panel technology or that Telegen will not encounter technical or other
serious difficulties in its development, commercialization or volume
manufacturing which would be materially adverse to Telegen's results of
operations.
Telegen's Dependence Upon Key Personnel
Telegen's future success will depend in significant part upon the
continued service of certain key technical and senior management personnel, and
Telegen's ability to attract, assimilate and retain highly qualified technical,
managerial and sales and marketing personnel. Competition for such personnel is
intense, and there can be no assurance that Telegen can retain its existing key
managerial, technical or sales and marketing personnel or that it can attract,
assimilate and retain such employees in the future. The loss of key personnel or
the inability to hire, assimilate or retain qualified personnel in the future
could have a material adverse effect upon Telegen's results of operations.
Telegen has entered into agreements with each of its executive officers
(as well as all other full-time employees) that prohibit disclosure of
confidential information to anyone outside of Telegen both during and subsequent
to employment and require disclosure and assignment to Telegen of all
proprietary rights to any ideas, discoveries or inventions relating to or
resulting from the officer's work for Telegen.
Flat Panel Competition; Flat Panel Patent(s)
The market for flat panel displays is dominated by major Japanese
companies such as Sharp Electronics, Toshiba and Sony. Telegen expects this
competition to continually increase. There can be no assurance that Telegen will
be able to compete effectively against its competitors, many of
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whom may have substantially greater financial resources than Telegen. Flat panel
displays manufactured utilizing AMLCD technology have been in production for
almost 10 years and have proven market acceptance. New technologies, such as FED
and Color Plasma, are in development by a number of potential competitors, some
of whom have greater financial resources than Telegen. Telegen does not own or
lease a manufacturing facility for, and has not begun the process of, volume
manufacturing of flat panel displays. There can be no assurance that Telegen's
flat panel technology can compete successfully on a cost or display quality
basis with these other technologies. Further, there can be no assurance that
Telegen's efforts to obtain patent protection for its flat panel technology will
be successful or, if patent protection is obtained, that Telegen's patent(s)
will provide adequate protection.
Telegen's Dependence Upon Limited Number of Manufacturing Sources and Component
Suppliers
Telegen currently relies upon a limited number of manufacturing sources
for its telecom production capability. Although Telegen is currently seeking to
qualify alternative sources of supply, Telegen has not yet contracted for
alternative suppliers to perform such manufacturing activities. In the event of
an interruption of production or delivery of supplies, Telegen's ability to
deliver its products in a timely fashion would be compromised, which would be
materially adverse to Telegen's results of operations. Certain components used
in Telegen's telecommunications products, such as microprocessors, are available
from only a limited number of sources. Although to date Telegen has generally
been able to obtain adequate supplies of these components, Telegen obtains these
components on a purchase order basis and does not have long-term contracts with
any of these suppliers. In addition, some suppliers require that Telegen either
pre-pay the price of components being purchased or establish an irrevocable
letter of credit for the amount of the purchase. Telegen anticipates that, as it
begins manufacture of other products, it will encounter similar limitations
regarding the components for those products. Telegen's inability in the future
to obtain sufficient limited-source components for its telecommunications and
other products, or to develop alternative sources, could result in delays in
product introductions or shipments, which could have a material adverse effect
on Telegen's results of operations.
Telegen's Need to Develop Marketing Experience
Telegen has limited marketing experience, and expanding Telegen's
markets will require significant expenses, including additions to personnel.
There can be no assurance that Telegen will have all the capital resources
necessary to expand its sales and marketing operations, or that Telegen's
attempts to expand its sales and marketing efforts will be successful.
Intellectual Property
Telegen relies on a combination of patents, trade secret and other
intellectual property law, nondisclosure agreements and other protective
measures to preserve its rights pertaining to its products. Such protection,
however, may not preclude competitors from developing products similar to those
of Telegen. In addition, the laws of certain foreign countries do not protect
Telegen's intellectual property rights to the same extent as do the laws of the
United States. There can also be
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no assurance that third parties will not assert intellectual property
infringement claims against Telegen. One such matter was recently dismissed
without prejudice to the Company but there is no assurance that more claims will
not be initiated from litigants with more resources than Telegen. There is no
assurance that Telegen will prevail in such litigation seeking damages or an
injunction against the sale of Telegen's products or that Telegen will be able
to obtain any necessary licenses on reasonable terms or at all.
Listing of the Company's Stock on the OTC Bulletin Board
The Company currently trades its stock on the Over-the-Counter
Electronic Bulletin Board (the "EBB"). The EBB is a real-time electronic
quotation service for over-the-counter securities. The EBB is not an automated
quotation system and is characterized by low volume of trading. There is no
assurance that the EBB can or will provide sufficient liquidity to holders of
the Company's Common Stock. The Company was trading on the Nasdaq SmallCap
Market until January 22, 1998 and intends to return to it as soon as it meets
the listing and maintenance requirements. On February 22, 1998, Nasdaq raised
such listing and maintenance requirements. There can be no assurance that
trading on the EBB will provide investors with sufficient liquidity for the
purchase and sale of the Common Stock or that the Company will be able to meet
the higher Nasdaq SmallCap Market ("SmallCap") listing and maintenance
requirements that have been in effect since February 22, 1998, in the near
future, or if at all, or that if the Company does meet the SmallCap requirements
that a broad trading market will develop in the Common Stock.
ITEM 8. FINANCIALS & SUPPLEMENTARY DATA
The information required by this Item is set forth in the Company's
Financial Statements and Notes thereto beginning at page F-1 of this report.
ITEM 9. TELEGEN CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Cordovano & Company, P.C., was the Company's independent accountant
when the Company was a dormant public shell. Upon the merger of the Company with
the existing operating company on October 28, 1996 (the "Merger"), Cordovano &
Company P.C. was replaced as Telegen's principal accountant. Coopers & Lybrand
L.L.P. , has been engaged as the independent accountant for Telegen as a result
of the Merger, and is rendering its opinion of Telegen with respect to the
financial statements of Telegen Communications Corporation for the years ended
December 31, 1997 and 1996. Coopers & Lybrand, L.L.P. has audited the financial
statements of Telegen Communications Corporation, the operating company that is
the predecessor to the Registrant, for the past seven fiscal years of operation.
The decision to change accountants was approved by the Board of Directors of
Telegen on November 11, 1996 to become effective upon the filing by Telegen of
its 10-QSB for the period ending September 30, 1996.
During 1996 Cordovano & Company, P.C.'s report on the financial
statements of Telegen for that year did not contain an adverse opinion,
disclaimer of opinion, or was qualified as to uncertainty, audit scope, or
accounting principles. During the three most recent fiscal years prior to
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such dismissal and any subsequent interim period preceding such dismissal there
were no disagreements between Telegen's predecessor dormant public shell and
Cordovano & Company, P.C. regarding any matter of accounting principles or
practice, financial statement disclosure, or auditing scope or procedure.
PART III
Items 10, 11, 12, 13 to be included by amendment to this Form 10-K by
April 30, 1998.
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
(a) Financial Statements.
(1) Report of Independent Accountants;
(2) Consolidated Balance Sheets of December 31, 1997 and 1996;
(3) Consolidated Statement of Operations for the years ended
December 31, 1997, 1996, and 1995;
(4) Consolidated Statements of Shareholders' Equity (Deficit) for
the years ended December 31, 1997, 1996, and 1995;
(5) Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995;
(6) Notes to Consolidated Financial Statements.
(7) Unaudited Pro Forma Balance Sheet as of December 31, 1997
(8) Unaudited Pro Forma Consolidated Statement of Operations
for the year ended December 31, 1997
(9) Notes to Unaudited Pro Forma Consolidated Financial Statements
(b) Reports on Form 8-K.
To date from the beginning of the fourth quarter of fiscal year 1997,
the Company has filed four (4) Current Reports on Form 8-K as follows:
(1) Current Report on Form 8-K filed with the Commission
on October 15, 1997 to report the Company's $500,000
Common Stock and Warrant financing;
(2) Current Report on Form 8-K filed with the Commission
on January 15, 1998 to report the Company's sale of
its wholly-owned subsidiary Morning Star Multimedia,
Inc., a New Jersey corporation;
(3) Current Report on Form 8-K filed with the Commission
on March 24, 1998 to report potential materially
adverse legal proceedings;
(4) Current Report on Form 8-K filed with the Commission
on April 7, 1998 to report the Company's sale of
substantially all of the assets of its wholly-owned
subsidiary Telegen Communications Corporation, a
California corporation and the receipt by the Company
of certain funding commitments; contained in this
Annual Report on Form 10-K are the pro forma
financial statements and the asset purchase
agreement, respectively, which the Company was
required to file in connection with this Form 8-K.
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(c) Exhibits.
2.1* Stock Purchase Agreement Among Morning Star Acquisition, Inc.,
Morning Star Multimedia, Inc., and Telegen Corporation dated
December 31, 1997
2.2 Asset Purchase of TCC Agreement by and between Synercom, Inc.
and Telegen Corporation dated April 1, 1997
Certain exhibits and schedules to Exhibit 2.2 are listed on
page 23 thereto and the Registrant agrees to furnish them
supplementally to the Securities and Exchange Commission upon
request.
3.1** Articles of Incorporation of Telegen Corporation dated August
30, 1996 [formerly known as Solar Energy Research Corp. of
California]
3.2** Certificate of Amendment to the Articles of Incorporation of
Telegen Corporation dated October 28, 1996 [formerly known as
Solar Energy Research Corp. of California]
3.3+ Certificate of Determination with respect to the Company's
outstanding Series A Preferred Stock filed with the California
Secretary of State on March 20, 1997
3.4** Bylaws of Telegen Corporation
3.5 Certificate of Amendment of Bylaws effective August 6, 1997
4.1 Form of Convertible Promissory Note issued by the Company in
November 1997
10.1** Service Agreement between MCI Telecommunications Corporation
and Telegen Communications Corporation
10.2** Agreement among Telegen Communications Corporation, Telegen
Display Laboratories, Inc., Transtech Electronics Pte, Ltd.,
and IPC Corporation, Ltd., dated May 30, 1996
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10.3** Manufacturing License Agreement among Telegen Communications
Corporation, Telegen Display Laboratories, Inc., Transtech
Electronics Pte, Ltd., and IPC Corporation, Ltd., dated May
30, 1996
10.4** Lease Agreement between Metropolitan Life Insurance Company
and Telegen Corporation for premises located in Foster City,
California
10.5** Lease Agreement between Metropolitan Life Insurance Company
and Telegen Corporation for premises located in Redwood City,
California
10.6** Warrant Certificate of Telegen Display Laboratories, Inc. by
and between Telegen Display Laboratories, Inc., and W. Edward
Naugler, Jr., to purchase 500,000 shares of Common Stock of
Telegen Display Laboratories, Inc.
10.7** License and Stock Purchase Agreement by and between Telegen
Communications Corporation and Telegen Display Laboratories,
Inc. effective as of May 2, 1996
10.8*** Shareholder Agreement between Janmil Holdings PTE LTD and
Telegen Communications Corporation dated June 4, 1997
10.9+ Subscription Agreement For 8% Convertible Preferred Stock by
and between Telegen Corporation and Silenus Limited dated
March 24, 1997
10.10++ Amendment Agreement to 8% Convertible Preferred Stock of
Telegen Corporation dated July 22, 1997
10.11 Form of Subscription Agreement for the Company's Common Stock
financing August, 1997
10.12 Form of Subscription Agreement for the Company's Common Stock
and Warrant Financing October, 1997
10.13 Form of Subscription Agreement for the Company's Convertible
Note and Warrant Financing November, 1997
10.14 Form of $2.25 Warrant issued to certain purchasers in the
Common Stock Financing August, 1997
10.15 Form of $4.00 Warrant to Purchase Common Stock issued by the
Company to certain purchasers in the Common Stock and Warrant
Financing October, 1997
10.16 Form of $0.01 Warrant to Purchase Common Stock issued to
certain purchasers in the Common Stock and Warrant Financing
October, 1997
-22-
10.17 Form of $2.25 Warrant to Purchase Common Stock issued by the
Company to certain purchasers in the Convertible Note and
Warrant Financing November, 1997
10.18 Employment Agreement by and between the Company and Jessica L.
Stevens dated May 3, 1990
10.19 Employment Agreement by and between the Company and Bonnie
Crystal dated May 4, 1990.
10.20 Employment Agreement by and between the Company and Warren M.
Dillard dated November 1, 1993.
10.21 Employment Agreement by and between the Company and Fred Y.
Kashkooli dated October 31, 1997
10.22 Exchange Offer Agreement by and between the Company and
certain holders of Common Stock dated March 24, 1998
11.1 Statement Re Computation of Per Share Earnings
12.1 Statement Re Computation of Ratios
21.1 Subsidiaries of the Registrant
24.1+++ Power of Attorney
27.1 Financial Data Schedule
* Incorporated by reference herein to the 8-K filed by the Registrant on
January 15, 1998
** Incorporated by reference herein to the 10-K filed by the Registrant on
March 31, 1997 and amended on April 9 and April 30,1997
*** Incorporated by reference herein to the 8-K filed by the Registrant on July
8, 1997
+ Incorporated by reference herein to the 8-K filed by the Registrant on
March 25, 1997
++ Incorporated by reference herein to the 8-K filed by the Registrant on
August 11, 1997
+++ Incorporated by reference in the signature page herein.
-23-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TELEGEN CORPORATION
By: /s/ FRED Y. KASHKOOLI
--------------------------------
Fred Y. Kashkooli,
Chief Executive Officer
Date: April 15, 1998
POWER OF ATTORNEY
Know all persons by these presents, that each person whose signature
appears below constitutes and appoints Fred Y. Kashkooli, as his or her
attorney-in-fact, with full power of substitution, for him or her in any and all
capacities, to sign any amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated:
Signature Title Date
- ---------------------------------------- -------------------------------------- -----------------------------------
/s/ GILBERT F. DECKER Chairman of the Board April 14, 1998
- ----------------------------------------
Gilbert F. Decker
Director
- ----------------------------------------
Greg Bell
/s/ JAMES R. IVERSON Director April 14, 1998
- ----------------------------------------
James R. Iverson
/s/ FREDERICK T. LEZAK, JR. Director April 14, 1998
- ----------------------------------------
Frederick T. Lezak, Jr.
/s/ LARRY J. WELLS Director April 15, 1998
- ----------------------------------------
Larry J. Wells
Director
- ----------------------------------------
Jessica L. Stevens
Director
- ----------------------------------------
Bonnie Crystal
/s/ FRED Y. KASHKOOLI Chief Executive, Financial April 15, 1998
- ---------------------------------------- and Accounting Officer
Fred Y. Kashkooli
-24-
TELEGEN CORPORATION AND SUBSIDIARIES
------------------------------------
REPORT ON AUDITS CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
AND FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
-F1-
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants............................................................................F3
Consolidated Balance Sheets as of December 31, 1997 and 1996.................................................F4
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995............................................................................F6
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended
December 31, 1997, 1996 and 1995............................................................................F8
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995............................................................................F10
Notes to Consolidated Financial Statements...................................................................F12
-F2-
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders
Telegen Corporation and Subsidiaries
Redwood City, California
We have audited the consolidated balance sheets of Telegen Corporation and
Subsidiaries as of December 31, 1997 and 1996, and related consolidated
statements of operations, shareholders' equity (deficit), and cash flows for
each of the three years ended December 31, 1997, 1996 and 1995. 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 audits 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 Telegen Corporation and
Subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years ended December 31, 1997, 1996
and 1995, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company
has incurred operating losses, had negative cash flows from operations and has a
deficit shareholders' equity. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regards
to these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/S/ COOPERS & LYBRAND L.L.P.
Sacramento, California
April 14, 1998
-F3-
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
----------
1997 1996
ASSETS
Current assets:
Cash and cash equivalents $ 275,891 $ 3,166,657
Accounts receivable:
Trade, net of allowance for doubtful accounts of $66,000 in 1997
and $0 in 1996 -- 17,784
Related parties, net of allowance for doubtful accounts of
$6,753 in 1997 and $0 in 1996 213,121 109,544
Other 27,813 139,159
Inventory 75,760 173,841
Prepaid expenses and other current assets 17,664 387,609
------------ ------------
Total current assets 610,249 3,994,594
Property and equipment, net 1,546,183 1,664,374
Other assets 75,182 68,354
------------ ------------
$ 2,231,614 $ 5,727,322
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Convertible note payable $ 75,000 $ 96,117
Notes payable - shareholder -- 174,799
Accounts payable 1,571,104 357,366
Accrued payroll and related taxes 964,046 554,570
Accrued expenses 99,095 104,694
Deferred rent 46,975 4,987
Dividend payable 145,146 --
------------ ------------
Total current liabilities 2,901,366 1,292,533
Capital lease -- 18,549
Convertible notes payable 500,000 --
------------ ------------
Total liabilities 3,401,366 1,311,082
------------ ------------
Commitments and contingencies (Notes 13 and 14)
Minority interests -- 325,077
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
-F4-
Equity put options on common stock 300,000 --
------------ ------------
Shareholders' equity (deficit):
8% cumulative convertible Series A preferred stock, $1,000 liquidation
preference, authorized 15,000 shares, 0 shares issued and outstanding at
1997 and 1996, respectively
------------ ------------
Common stock, no par value; authorized 100 million shares, 8,235,016 and
5,021,460 shares issued and outstanding at 1997 and 1996, respectively 16,031,336 10,399,318
Additional paid-in capital 4,133,640 4,133,640
Accumulated deficit (21,634,728) (10,441,795)
------------ ------------
Total shareholders' (deficit) equity (1,469,752) 4,091,163
------------ ------------
$ 2,231,614 $ 5,727,322
------------ ------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
-F5-
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995
----------
1997 1996 1995
Revenues:
Sales of products $ 463,486 $ 23,700 $ 145,795
Contract services 574,916 517,356 --
------------ ------------ ------------
1,038,402 541,056 145,795
------------ ------------ ------------
Cost of goods sold (234,292) (18,083) (170,421)
Cost of contract services (93,793) (68,612) --
------------ ------------ ------------
(328,085) (86,695) (170,421)
------------ ------------ ------------
Gross profit (loss) 710,317 454,361 (24,626)
Operating expenses:
Selling and marketing 1,368,767 439,350 89,275
Research and development 4,400,036 2,386,331 842,026
General and administrative 5,553,209 3,043,530 1,506,531
------------ ------------ ------------
Loss from operations (10,611,695) (5,414,850) (2,462,458)
Other income (expense):
Interest income 29,169 194,443 725
Interest expense (89,364) (146,650) (81,105)
Other (109,098) -- --
------------ ------------ ------------
Loss before minority interests and
extraordinary gain (10,780,988) (5,367,057) (2,542,838)
Minority interests in subsidiary net loss 325,077 252,031 --
------------ ------------ ------------
Loss before extraordinary gain (10,455,911) (5,115,026) (2,542,838)
Extraordinary gain on sale of subsidiary, net of
tax effect of $0 536,179 -- --
------------ ------------ ------------
Net loss $ (9,919,732) $ (5,115,026) $ (2,542,838)
------------ ------------ ------------
Net loss per common share attributable to common
shareholders:
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
-F6-
Basic:
Loss before extraordinary gain $ (2.11) $ (1.16) $ (0.88)
Extraordinary gain 0.10 -- --
------------ ------------ ------------
Net loss $ (2.01) $ (1.16) $ (0.88)
------------ ------------ ------------
Diluted:
Loss before extraordinary gain $ (2.11) $ (1.16) $ (0.88)
Extraordinary gain 0.10 -- --
------------ ------------ ------------
Net loss $ (2.01) $ (1.16) $ (0.88)
------------ ------------ ------------
Weighted average common shares outstanding 5,547,015 4,418,099 2,882,961
------------ ------------ ------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
-F7-
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT)
for the years ended December 31, 1997, 1996 and 1995
----------
Preferred
Stock Common Stock
---------------------------- ------------ ------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
Balance, December 31, 1994 47,500 $ 350,704 2,818,552 $ 2,111,742
Preferred stock issued, net of offering cost of $80,678 65,250 571,822 -- --
Common stock issued, net of offering cost of $70,933 -- -- 96,285 445,966
Issuance of common stock warrants -- -- -- 251,995
Pooling of interests with Morning Star Multimedia -- -- 133,333 5,000
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1995 112,750 922,526 3,048,170 2,814,703
Conversion of preferred stock into common stock (112,750) (922,526) 185,500 922,526
Common stock issued, net of offering costs of 2,467,763 -- -- 1,787,790 6,461,929
Issuance of common stock warrants -- -- -- 200,160
Additional paid-in capital (Note 1) -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1996 -- -- 5,021,460 10,399,318
Preferred stock issued, net of offering cost of $336,000 4,000 2,854,925 -- --
Accretion of preferred stock discount -- 1,078,055 -- --
Preferred stock dividends -- -- -- --
Conversion of preferred stock into common stock (4,000) (3,932,980) 1,894,779 3,932,980
Issuance of common stock:
September 1997 Private Placement, net of offering costs of $5,422 -- -- 220,404 490,487
October 1997 Private Placement, net of offering costs of $211,148 -- -- 500,000 888,352
To employees for services -- -- 15,001 87,766
To non-employees for services -- -- 43,798 164,407
Exercise of employee options -- -- 22,743 113,715
Exercise of warrants -- -- 473,815 84,375
To employees under Stock Purchase Plan -- -- 43,016 119,936
Exercise of put option and accretion to the put price -- -- -- (250,000)
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1997 -- -- 8,235,016 16,031,336
------------ ------------ ------------ ------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
-F8-
Additional
Paid-in Accumulated
Capital Deficit Total
------------ ------------ ------------
Balance, December 31, 1994 $ -- $ (2,783,931) $ (321,485)
Preferred stock issued, net of offering cost of $80,678 -- -- 571,822
Common stock issued, net of offering cost of $70,933 -- -- 445,966
Issuance of common stock warrants -- -- 251,995
Pooling of interests with Morning Star Multimedia -- -- 5,000
Net loss -- (2,542,838) (2,542,838)
------------ ------------ ------------
Balance, December 31, 1995 -- (5,326,769) (1,589,540)
Conversion of preferred stock into common stock -- -- --
Common stock issued, net of offering costs of 2,467,763 -- -- 6,461,929
Issuance of common stock warrants -- -- 200,160
Additional paid-in capital (Note 1) 4,133,640 -- 4,133,640
Net loss -- (5,115,026) (5,115,026)
------------ ------------ ------------
Balance, December 31, 1996 4,133,640 (10,441,795) 4,091,163
Preferred stock issued, net of offering cost of $336,000 -- -- 2,854,925
Accretion of preferred stock discount -- (1,078,055) --
Preferred stock dividends -- (145,146) (145,146)
Conversion of preferred stock into common stock -- -- --
Issuance of common stock:
September 1997 Private Placement, net of offering costs of $5,422 -- -- 490,487
October 1997 Private Placement, net of offering costs of $211,148 -- -- 888,352
To employees for services -- -- 87,766
To non-employees for services -- -- 164,407
Exercise of employee options -- -- 113,715
Exercise of warrants -- -- 84,375
To employees under Stock Purchase Plan -- -- 119,936
Exercise of put option and accretion to the put price -- (50,000) (300,000)
Net loss -- (9,919,732) (9,919,732)
------------ ------------ ------------
Balance, December 31, 1997 $ 4,133,640 $(21,634,728) $ (1,469,752)
------------ ------------ ------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
-F9-
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
----------
1997 1996 1995
Cash flows from operating activities:
Net loss $ (9,919,732) $ (5,115,026) $ (2,542,838)
Adjustments to reconcile net loss to net cash used in
operating activities:
Minority interests in subsidiary's net loss (325,077) (252,031) --
Loss on disposal of assets 5,109 -- --
Extraordinary gain on sale of subsidiary (536,179) -- --
Depreciation and amortization 437,574 187,444 72,053
Amortization of deferred financing costs 68,000 197,248 22,529
Accretion of bridge loan discount -- 156,627 17,833
Allowance for doubtful accounts 72,753 -- 14,113
Provision for inventory write-downs -- 217,985 19,381
Operating expenses paid with issuance of common stock and
common stock equivalents 252,173 325,045 536,964
Interest expense added to note payable principal -- -- 20,853
Changes in operating assets and liabilities:
Accounts receivable (47,965) (255,597) 8,382
Prepaid expenses 368,212 (386,421) 28,044
Inventory 98,081 (14,199) (251,718)
Deposits (68,975) (54,857) --
Accounts payable 1,397,315 (651,966) 697,783
Accrued expenses 698,105 145,519 323,275
------------ ------------ ------------
Net cash used in operating activities (7,500,606) (5,500,229) (1,033,346)
------------ ------------ ------------
Cash flows used in investing activities:
Insurance proceeds on fixed assets -- -- 12,500
Proceeds on sale of subsidiary 200,000 -- --
Purchase of fixed assets (540,205) (1,671,271) --
------------ ------------ ------------
Net cash (used in) provided by investing activities (340,205) (1,671,271) 12,500
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from borrowings 500,000 275,000 457,640
Principal payments on notes payable (101,745) (990,875) (26,203)
Issuance of common stock, net of offering costs 1,696,865 6,270,694 163,165
Issuance of preferred stock, net of offering costs 2,854,925 -- 571,822
Bridge loan offering costs -- -- (84,963)
Issuance of stock by subsidiary, net of offering costs -- 4,604,998 --
------------ ------------ ------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
-F10-
Net cash provided by financing activities 4,950,045 10,159,817 1,081,461
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (2,890,766) 2,988,317 60,615
Cash and cash equivalents at beginning of year 3,166,657 178,340 117,725
------------ ------------ ------------
Cash and cash equivalents at end of year $ 275,891 $ 3,166,657 $ 178,340
------------ ------------ ------------
Supplemental disclosures:
Cash paid for interest $ 32,290 $ 146,240 $ 98
------------ ------------ ------------
Cash paid for income taxes $ 800 $ 1,750 $ 800
------------ ------------ ------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
-F11-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Summary of Significant Accounting Policies:
Nature of Business
Telegen Corporation (Company) is a diversified, high technology company
with products, both developed and in development, in the flat panel
display, telecommunications, and Internet hardware markets. Currently,
the Company is actively developing its flat panel display technology. In
November 1996, the Company merged with a SEC registrant (Registrant).
Pursuant to the merger agreement, among other things, each share of
common and preferred stock of the Company was converted into shares of
common stock and preferred stock of the Registrant (after giving effect
to a 7.25:1 reverse split of the Registrant's common stock). The
surviving company is know as Telegen Corporation and the directors of
the Company are the directors of the surviving company.
During 1996, the Company formed a subsidiary, Telegen Display
Laboratories (TDL), for the development and commercialization of High
Gain Emissive Display technology.
As discussed in Note 3, the Company sold its interest in Morning Star
MultiMedia, Inc. (Morning Star) on December 31, 1997. The Company had
acquired Morning Star during 1996 through a pooling of interests whereby
all of the outstanding stock of Morning Star was exchanged for shares of
the Company. Morning Star creates and supplies interactive CD-ROM and
Internet-based entertainment and infotainment software.
As disclosed in Note 14, subsequent to December 31, 1997, the Company
entered into an agreement to sell substantially all of the tangible and
intangible assets of its telecommunications subsidiary to a related
party. The buyer also assumed certain liabilities.
Consolidation
The consolidated financial statements include the accounts of Telegen
Corporation and its wholly and majority owned subsidiaries, collectively
"the Company". All material intercompany accounts and transactions have
been eliminated upon consolidation.
Sale of Stock by Subsidiary
During 1996, TDL issued common stock to third parties totaling
approximately $5,200,000 thereby changing the Company's percentage
ownership in TDL. The amount
The accompanying notes are an integral part of these financial
statements.
-F12-
TELEGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS
per share of the common stock sold to the third parties was greater than
the average carrying amount per share of the Company's investment in
TDL. As a result of the Company's increase in its share of TDL's
shareholders' equity, an increase in additional paid-in-capital was
recorded upon consolidation.
1. Summary of Significant Accounting Policies, continued:
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) 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 reported period. Actual results could differ
from the estimates.
Cash and Cash Equivalents
Cash equivalents are defined as highly liquid investments which have
original maturities of three months or less from the date acquired. At
December 31, 1997, the Company's cash deposits included cash in banks of
$143,622, of which $100,000 is federally insured.
Inventory
Inventory of telephone accessory products and component parts is stated
at the lower of cost (weighted average method) or market value.
Property and Equipment
Property and equipment are stated at cost. Depreciation of equipment is
provided using the straight-line method over the estimated useful lives
of five years. Amortization of leasehold improvements is provided on the
straight-line method over the shorter of the estimated useful life of
the improvement or the term of the lease. Furniture and equipment
received in exchange for stock is recorded at the stockholder's basis.
Costs of maintenance and repairs are expensed while major improvements
are capitalized. Gains or losses from disposals of property and
equipment are reflected in current operations.
Revenue Recognition
The Company performs research and development contracts for other
entities. Revenue on long-term software contracts is generally recorded
using the percentage-of-completion method for financial reporting
purposes. Sales of other products or services are recorded
-F13-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
---------------
as products are shipped or services are rendered.
-F14-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
---------------
1. Summary of Significant Accounting Policies, continued:
Research and Development Costs
Expenditures relating to the development of new products and processes,
including significant improvements to existing products, are expensed as
incurred.
Income Taxes
The Company reports income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes, which requires the liability method in accounting for income
taxes. Deferred tax assets and liabilities arise from the differences
between the tax basis of an asset or liability and its reported amount
in the financial statements.
Deferred tax amounts are determined by using the tax rates expected to
be in effect when the taxes will actually be paid or refunds received,
as provided under currently enacted tax law. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense or credit is the tax payable
or refundable, respectively, for the period plus or minus the change
during the period in deferred tax assets and liabilities.
Net Loss Per Common Share
During 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share, which established new standards for computing
and presenting earnings per share for entities with publicly-held common
stock. The Company has adopted and retroactively applied the
requirements of SFAS No. 128 to all periods presented.
Concentration of Credit Risk
Most of the Company's revenues are derived from sales to a few large
companies with significant cash resources. Therefore, the Company
considers its credit risk related to these transactions to be minimal.
The Company invests its excess cash in certificates of deposits and
depository accounts of banks with strong credit ratings. These
certificates of deposits and the Company's cash deposits typically bear
minimal risk and the Company has not experienced any losses on its
investments due to institutional failure or bankruptcy.
-F15-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. Summary of Significant Accounting Policies, continued:
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25), and related
interpretations in accounting for its employee stock options. Under APB
25, the Company uses the intrinsic value method to account for its
stock-based compensation plans. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (see Note 8).
Recently Issued Accounting Pronouncements
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, and SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 130
establishes standards for reporting comprehensive income and is
effective in 1998. SFAS No. 131 establishes standards for annual and
interim disclosures of operating segments, products and services,
geographic areas and major customers, and is also effective in 1998. The
Company is in the process of evaluating the disclosure requirements of
the new standards, the adoption of which will have no impact on the
Company's results of operations or financial condition.
Reclassifications
Certain amounts in the Company's consolidated financial statements for
the year ended December 31, 1996, have been reclassified to conform with
the presentation of the Company's financial statements for the year
ended December 31, 1997. These reclassifications have no effect on the
Company's equity or net loss for the years ended December 31, 1996 or
1995.
-F16-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Basis of Presentation:
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The Company has incurred operating losses, had
negative cash flows from operations and has a deficit shareholders'
equity. The Company is currently experiencing severe cash flow problems.
The Company has deferred the payment of wages to key management and is
delinquent in paying certain amounts in state and federal wage
withholding taxes and social security taxes in 1997. These factors raise
substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments
relating to the recoverability of assets and classification of
liabilities that might result from the outcome of this uncertainty.
As discussed in Note 14, the Company entered into an agreement with
individuals associated with the Company for the sale of Telegen
Communications Corporation, the Company's telecommunications subsidiary
("TCC"), for $500,000 and royalty streams on certain TCC products for up
to three years.
Management has taken steps to reduce administrative overhead which
includes significant payroll reduction and subletting space.
In addition, the Company is currently seeking debt and equity financing
to support its product development, manufacturing and marketing efforts.
There can be no assurance that the Company's efforts described above
will be successful. In addition, there can be no assurance that the sale
of TCC or the Company's financing efforts will produce the necessary
cash flow required to fund the Company's on-going operations.
3. Business Combinations:
Morning Star MultiMedia, Inc.
On December 31, 1996, Morning Star MultiMedia, Inc. (Morning Star) was
merged with and into the Company, and 133,333 shares of the Company's
common stock were issued in exchange for all of the outstanding common
stock of Morning Star. The merger was accounted for as a pooling of
interests, and accordingly, the Company's financial statements for all
periods prior to the merger have been restated to include the accounts
and operations of Morning Star.
-F17-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Business Combinations, continued:
On December 31, 1997, the Company sold all of its stock holdings in
Morning Star to a company owned by certain of the Company's stockholders
for $200,000 plus royalty streams to be paid to the Company for a period
of two years from December 31, 1997, of 5% to 10% of gross sales of
certain Morning Star CD-ROM products. As a result, the Company
recognized a gain of approximately $536,000 on the sale of its interest
in Morning Star, which is recorded as an extraordinary gain.
Separate results of Telegen and Morning Star for the years ended
December 31, are as follows:
1997 1996 1995
----------- ----------- -----------
Net sales:
Telegen $ 463,486 $ 23,700 $ 145,795
Morning Star 574,916 517,356 --
----------- ----------- -----------
$ 1,038,402 $ 541,056 $ 145,795
----------- ----------- -----------
Net loss:
Telegen $(9,858,233) $(4,860,258) $(2,517,926)
Morning Star (61,499) (254,768) (24,912)
----------- ----------- -----------
$(9,919,732) $(5,115,026) $(2,542,838)
----------- ----------- -----------
SERC
In November 1996, Solar Energy Research Corp. (SERC), a SEC registrant,
acquired all of the outstanding common stock of the Company. For
accounting purposes, the acquisition has been treated as a
recapitalization of the Company with the Company as the acquirer
(Reverse Acquisition). The historical financial statements prior to
November 1996 are those of the Company. Common stock shares have been
restated for all periods presented prior to the transaction to reflect
196,910 shares issued to previous SERC stockholders. Because SERC was a
public shell, no goodwill was recorded as a result of the transaction
and pro forma information is not required to be presented. The Company's
costs of the transaction were approximately $300,000 and were charged to
expense.
-F18-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Inventory:
Inventories consist of the following at December 31:
1997 1996
-------- --------
Raw materials and supplies $ 75,760 $ 88,555
Finished goods -- 85,286
-------- --------
$ 75,760 $173,841
-------- --------
5. Property and Equipment:
Property and equipment are stated at cost and consist of the following
at December 31:
1997 1996
----------- -----------
Machinery and equipment $ 1,456,268 $ 1,343,906
Leasehold improvements 710,567 573,893
Office furniture and fixtures 86,173 75,542
----------- -----------
2,253,008 1,993,341
Less accumulated depreciation
and amortization (706,825) (328,967)
----------- -----------
$ 1,546,183 $ 1,664,374
----------- -----------
-F19-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Notes Payable:
Notes payable consist of the following at December 31:
1997 1996
Notes payable convertible to common
stock, interest at 6% due quarterly,
principal payable at the Company's
discretion but no later than May
1999, without collateral 500,000 --
Subordinated notes payable convertible
to common stock at lender's option,
interest payable on $50,000 at 10%
and on $25,000 at 18%, principal and
accrued interest due on demand,
without collateral. Notes
subordinated to senior indebtedness
as defined in the agreement 75,000 75,000
Notes payable to shareholders, interest
at 10%, principal and interest due
December 1997, without collateral -- 114,553
Note payable to shareholder, interest
at 10%, principal and interest due
March 1997, without collateral -- 60,246
Other -- 21,117
--------- ---------
575,000 270,916
Less current maturities (75,000) (270,916)
--------- ---------
500,000 --
--------- ---------
During 1997, a board member and the Company's placement agent made
short-term loans to the Company, totaling $125,000. The notes plus
$2,436 of accrued interest were repaid to the lenders during 1997.
-F20-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Notes Payable, continued:
$75,000 Convertible Subordinated Note Payable
The principal balance of the $75,000 convertible subordinated note
payable is convertible, at the holder's discretion, into common stock of
the Company at a rate of $7 per share.
$500,000 Convertible Promissory Notes
The Company initiated a private offering on a subscription basis of up
to 20 units (each, a "Note Unit") to accredited investors (the "Note
Unit Investors") with a purchase price per Unit of $50,000 (the "Note
Unit Offering"). Each Note Unit consists of (i) a convertible promissory
note with a face value of $50,000 (each a "Unit Note") and (ii) a
warrant to purchase 10,000 shares of common stock, at a $2.25 per share
exercise price (each a "$2.25 Warrant"). Upon closing the offering on
November 26, 1997, the Company sold ten (10) Note Units. As part of the
consideration for placing the Note Units, the Company's placement agent
received a warrant to purchase 80,000 shares of Common Stock for every
$500,000 of Note Units sold; such warrant has the same terms as the
$2.25 Warrants.
Each Note has an 18-month term from the date of issuance and carries
simple interest at 6% per annum payable at the Company's discretion in
cash or stock, and is convertible (after 90 days) into common stock at
the holder's option at a conversion price of the lesser of (i) $2.75, or
(ii) seventy-five percent (75%) of the lowest NASDAQ trading price as
defined in the applicable agreements depending upon the date of
conversion. At maturity, each Note automatically converts to common
stock according to the above conversion formula. The discount resulting
from the below market conversion feature was amortized to interest
expense using the interest method over a period of 90 days. Each $2.25
Warrant has a four-year term from issuance, is immediately exercisable
and may be exercised on a net-exercise basis, at the option of the
holder.
-F21-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. Preferred Stock:
Cumulative Preferred Stock (Series A Preferred Stock)
In March 1997, the Company partially completed a private placement with
a face value of up to $15 million to support the Company's research and
development programs and for general working capital purposes. The
private placement agreement provides for 8% Cumulative Series A
Preferred Stock (Series A Preferred Stock) issuable at a 20% discount.
The 20% discount of $800,000 was accrued over the period from issuance
to the earliest conversion date, using the interest method. The
financing was expected to take place in three tranches, each amounting
to $5 million in face value. During 1997, the Company had issued 4,000
shares of Series A Preferred Stock, with a face value of $4,000,000. The
remaining funding of the Series A Preferred Stock is not expected to
occur. In addition, approximately 204,000 warrants were issued to the
holders to purchase common stock in an aggregate amount of 20% of the
value of the Series A Preferred Stock actually funded at a fixed price
per share (fair value at the date of issuance). In addition to an 8%
commission, placement agents received 133,440 warrants to purchase
common stock in an aggregate amount of 10% of the face value of the
Series A Preferred Stock actually funded at a fixed price per share
(fair value at the date of issuance). The Company has also agreed not to
sell any new equity series at a discount except in certain circumstances
as defined in the agreement.
The Company also entered into an Amendment Agreement to the Series A
Preferred Stock Subscription Agreement dated July 7, 1997 (the
"Amendment Agreement") which entitles the Series A Preferred Stock
holder to additional discounts of 3%, 6%, or 9% off of the Conversion
Price, as that term is defined in the Amendment Agreement, based on the
dates on which the preferred stock holder converts the New Series A
Preferred Stock into common stock. The additional discounts of
approximately $269,000 were accrued using the applicable discount rate.
As of December 31, 1997, the Series A Preferred Stock was fully
converted to the Company's common stock.
-F22-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Common Stock:
Common Stock Issuances During 1997
In August 1997, the Company initiated a private offering on a
subscription basis of 222,222 shares of its common stock, no par value
(the "Common Stock") to accredited investors (the "Common Investors"),
at a per-share price of $2.25 (the "Common Offering"), which
approximated fair market value during the period of the offering. As of
September 30, 1997, the Company closed the Common Offering and had sold
220,404 shares of Common Stock pursuant thereto. The Company guaranteed
a third party's put obligation related to 111,111 shares sold under this
private offering at $2.70 per share. At December 31, 1997, the Company
recognized a $250,000 obligation related to the equity put option on
common stock and an additional $50,000 accretion to the put price.
In connection with the Common Offering, the Company also delivered to
certain of the Common Investors an aggregate of 50,000 warrants to
purchase one share of Common Stock at a $0.01 per share ("0.01
Warrants"). The $0.01 Warrants have a four-year term from the date of
issuance and are exercisable immediately upon issuance. The Company has
the right to force the exercise of the $0.01 Warrants at any time after
their issuance.
In October 1997, the Company initiated a private offering on a
subscription basis of up to 500,000 units (each, a "Unit") to accredited
investors (the "Unit Investors"), with a purchase price per Unit of
$2.00 (the "Unit Offering"), which approximated fair market value of the
Company's common stock during the period of the offering. Each Unit
consisted of (i) one share of Common Stock, (ii) a $0.01 Warrant, and
(iii) a warrant to purchase one share of the Company's Common Stock at a
$4.00 per share exercise price (each, a "$4.00 Warrant," the $0.01
Warrants and the $4.00 Warrants are collectively the "Warrants"). As of
October 21, 1997 the Unit Offering was fully subscribed. As part of the
consideration for placing the Units and for fully subscribing the Unit
Offering, the Company issued the placement agent for the offering 50,000
$0.01 Warrants and accordingly $99,500 was recorded as additional
offering costs.
Units purchased under the Unit Offering and the $0.01 Warrants issued to
the placement agent are subject to lock up provisions which limit the
ability of a holder of common stock to sell common stock received upon
exercise of the Warrants. The purchased Units are divided into four (4)
equal groups (each, a "Group"), each having a separate lock-up period
(the "Lock-Up Period") for the resale of Common Stock purchased and the
sale of Common Stock upon exercise of the Warrants. The Lock-Up Period
for each Group expires on January 1, 1998, April 1, 1998, July 1, 1998
and October 1, 1998, respectively.
-F23-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Common Stock, continued:
The $4.00 Warrants have a four-year term from the date of issuance and
are exercisable immediately upon issuance. The Company has the right to
force the exercise of the $4.00 Warrants after the Company's common
stock trades for twenty (20) trading days at $6.00 or more.
In March 1998, as described in Note 14, the Company made available to
the Common Investors and the Unit Investors (Investors) an exchange
offer whereby, for the common stock purchases described above, the
Company offered convertible subordinated promissory notes to the
Investors in exchange for their common stock.
Common Stock Issuances During 1996
In February 1996, the Company initiated a private offering of its common
stock at $5.00 per share. Through May 1996, when the offering was
completed, the Company received gross proceeds of approximately
$6,671,950 for the issuance of 1,334,390 shares of common stock, paid
approximately $1,024,000 in placement agent fees, and issued to the
placement agent warrants to purchase 133,440 common shares at an
exercise price of $3.50 per share. Offering costs of $200,160 were
recorded to reflect the difference between the fair value of the common
stock and the warrants exercise price. In addition, 206,882 shares were
issued as additional commission and, accordingly, $1,034,410 was
recorded as additional offering costs.
1996 Stock Option Plan
In November 1996, the Company authorized a stock option plan under which
options to purchase shares of common stock may be granted to eligible
employees, officers and directors in the form of incentive stock options
(ISO's) and non-qualified stock options. The option exercise price shall
be no less than fair market value on the date of grant (110% in the case
of ISO's). The term of each option shall be stated in the option
agreement. The maximum shares that may be optioned under the plan is
500,000 shares. This plan replaced the October 29, 1993 employee stock
option plan.
In February 1998, the 1996 Stock Option Plan was amended to include a
provision regarding acceleration of vesting in connection with change in
control events. As well, the Company offered to all employees the
opportunity to exchange their outstanding options to purchase the
Company's common stock for the same number of new options with an
exercise price equal to the five day average of the closing trading
price before the effective date of the exchange. The new options will be
subject to a restarted three-year vesting schedule with a three-month
cliff.
-F24-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Common Stock, continued:
1993 Stock Option Plan
On October 29, 1993, the Company authorized a stock option plan under
which options to purchase shares of common stock may be granted to full
time employees. The number of options granted is based on employee
performance. The plan provides that the option price shall not be less
than the fair market value of the shares on the date of grant. Options
are exercisable on the date of the grant, expire five years from the
date of grant and vest over varying lengths of time, up to twelve
months.
In February 1996, the Board authorized the granting of options to an
employee to purchase 17,000 shares of common stock at $5 per share,
exercisable for a period of up to five years.
In addition, on October 29, 1993, the Company's Board of Directors
authorized granting to full time employees who successfully complete a
probationary period a number of shares of common stock or an option to
purchase a number of shares of common stock whose total market value on
the date of grant is equal to five percent of the employee's annual
salary. In 1996 and 1995, respectively, 4,163 shares and 1,582 shares
were issued to employees and $20,815 and $7,910 was recorded as an
expense. Options granted under this plan are included in the table
below.
In February 1998, the Company granted an officer of the Company an ISO
to purchase 280,000 shares of the Company's common stock under the 1996
Stock Option Plan and an option to purchase 440,000 shares of the
Company's common stock at fair market value of the Company's common
stock outside of the 1996 Stock Option Plan in satisfaction of his
employment contract with the Company.
Board of Director's Compensation
In February 1996, the Company's Board of Directors approved granting to
non-employee members of the Board $1,000 per Board meeting attended. The
Board members may elect to receive their compensation in the form of
common stock of the Company or options to purchase shares of the
Company's common stock at an exercise price equal to the fair value of
the shares at the beginning of the calendar year the options are
granted. Also, the Board approved granting to non-employee members of
the Board, options to purchase, on an annual basis, 20,000 shares of the
Company's common stock. The options will be granted at the beginning of
each calendar year at fair value and vest ratably over the year, unless
the member is discharged from the Board due to a merger, buyout or other
event not in the ordinary course of business, in which case the options
will vest immediately.
-F25-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Common Stock, continued:
In February 1996, the Board granted certain officers of the company
options to purchase shares of the Company's common stock at a price of
$5.00 per share for a period of five years. Options to purchase 200,000
shares were granted, of which 100,000 vested immediately and the
remaining options vested in 50,000 share increments over the remainder
of 1996.
Employee Stock Purchase Plan
In October 1996, the shareholders approved an Employee Stock Purchase
Plan (ESPP). The ESPP allows eligible employees the right to purchase
common stock on a semi-annual basis at the lower of 85% of the market
price at the beginning or end of each six-month offering period. As of
December 31, 1996, there were 200,000 shares of common stock available
for sale for the ESPP and there had been no issuances to date. The
offering periods commence on November 1 and May 1 of each year. A
liability has been recorded for ESPP withholdings not yet applied
towards the purchase of common stock.
The following summarizes the stock option transactions for the
three-year period ended December 31, 1997:
Weighted
Number Average
of Exercise
Shares Price
------ -----
Outstanding and exercisable at January 1, 1995 356,561 $ 4.97
Issued 98,352 $ 5.00
Exercised (150) $ 5.00
Forfeited (6,501) $ 5.00
----------
Outstanding and exercisable at December 31, 1995 448,262 $ 4.98
Issued 649,624 $ 5.00
Exercised (2,673) $ 3.50
Forfeited (10,410) $ 5.00
----------
Outstanding and exercisable at December 31, 1996 1,084,803 $ 5.00
Issued 366,923 $ 3.64
Exercised (22,743) $ 5.00
Forfeited (43,476) $ 2.90
----------
Outstanding at December 31, 1997 1,385,507 $ 4.71
--------- ------
-F26-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Exercisable at December 31, 1997 1,265,702 $ 4.90
--------- ------
8. Common Stock, continued:
Stock Based Compensation
The Company applies the measurement provisions of APB Opinion No. 25 and
related interpretations in accounting for the stock option plans.
Compensation costs of $16,000, $21,000 and $8,000, for the years ended
December 31, 1997, 1996 and 1995, respectively, have been recognized for
stock option plans. Had compensation cost for the stock option plans
been determined based on the fair value at the grant dates for awards
under the plans, consistent with the alternative method set forth under
SFAS 123, the Company's net loss and net loss per share would have been:
1997 1996 1995
Net loss:
As reported $ (9,919,732) $ (5,115,026) $ (2,542,838)
Pro Forma $ (10,426,293) $ (5,688,651) $ (2,571,216)
Basic and diluted net loss per share:
As reported $ (2.01) $ (1.16) $ (0.88)
Pro Forma $ (2.10) $ (1.29) $ (0.89)
The fair value of the options issued prior to the Reverse Acquisition is
estimated on the date of each grant using the Minimum Value pricing
model. For options issued subsequent to the Reverse Acquisition, the
fair value of the options is estimated on the date of grant using a
modified Black-Scholes option valuation formula. The following are
assumptions of the weighted-average information used to value stock
option grants in 1997, 1996 and 1995:
POST PRE
MERGER MERGER
1997 1996 1996 1995
Dividend yields 0 0 0 0
Expected volatility 102.34% 93.53% N/A* N/A*
Risk-free-interest rates 6.11% 5.44% 5.63%
Expected time to exercise 5 years 1 year 1 year 1 year
<FN>
* No assumption required for grant dates before the Company's stock was publicly traded
</FN>
The weighted-average grant date fair value of options for the year
ended December 31, 1997, was $3.55, $.27 and $2.76 for the periods
before and after the merger in 1996, respectively, and $.27 for the
year ended December 31, 1995.
-F27-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Common Stock, continued:
Warrants
The Company issued and at December 31, 1997, had outstanding warrants to
purchase common stock as follows:
Number of
Common
Shares to be
Issued upon
Warrant Exercise
Date of issuance Conversion Price Expiration Date
--------------------- ----------------- ------------- ---------------------------
August 1995 50,500 $ 0.01 August 2000
February 1997 34,625 3.50 April 2001
February 1997 25,000 7.00 April 2001
March 1997 151,351 6.94 March 2001
May 1997 10,000 4.38 August 2001
June 1997 52,614 2.85 July 2001
August 1997 50,000 0.01 August 2001
October 1997 500,000 4.00 October 2001
October 1997 50,000 0.01 October 2001
October 1997 125,000 0.01 October 2001
November 1997 180,000 2.25 November 2001
-----------
1,229,090
-----------
In August 1995, a shareholder and officer of the Company was issued
warrants to purchase 50,500 shares of common stock for $.01 per share
for a period of five years. The warrants can be exercised at any time.
Compensation expense totaling $251,995 was recorded to reflect the
difference between the fair value of the common stock and the exercise
price.
In January 1995 an employee was granted an option to purchase 5% of a
yet-to-be formed entity. In May 1996, the entity was formed and the
employee received warrants to purchase 500,000 shares in the newly
formed entity which represented a 5% interest.
In October 1996, an employee was issued warrants to purchase 25,000
shares of common stock. The warrants were exercised immediately and
$125,000 was recorded as compensation expense.
In September 1997, a warrant that was issued during 1996 to a placement
agent to purchase 90,065 shares at $3.50 per share was re-priced to
$0.56 per share. The holder
-F28-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
exercised the warrant in September 1997 resulting in approximately
$164,000 in additional offering costs.
-F29-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Common Stock, continued:
Earnings Per Share
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations under SFAS No. 128 is as
follows:
1997 1996 1995
Loss attributable to common shareholders:
Loss before extraordinary gain $(10,455,911) $ (5,115,026) $ (2,542,838)
Reconciling items:
Accretion of preferred stock
discount (1,078,055) -- --
Preferred stock dividends (145,146) -- --
------------ ------------ ------------
Loss attributable to common
shareholders before extraordinary
gain (11,679,112) (5,115,026) (2,542,838)
Extraordinary gain 536,179 -- --
------------ ------------ ------------
Loss attributable to common
shareholders $(11,142,933) $ (5,115,026) $ (2,542,838)
------------ ------------ ------------
Weighted average common shares outstanding
for determination of:
Basic earnings per share 5,547,015 4,418,099 2,882,961
------------ ------------ ------------
Diluted earnings per share 5,547,015 4,418,099 2,882,961
------------ ------------ ------------
-F30-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Income Taxes:
The income tax effect of temporary timing differences between financial
and income tax reporting that give rise to deferred income tax assets at
December 31, 1997, 1996 and 1995, under the provisions of SFAS No. 109
are as follows:
1997 1996 1995
----------- ----------- -----------
Federal net operating loss
carryforward $ 4,827,942 $ 2,637,417 $ 1,658,234
State operating loss carryforward 754,856 310,257 292,630
----------- ----------- -----------
5,582,798 2,947,674 1,950,864
Capitalized research and
experimentation 2,412,644 749,162 --
Other (217,730) 96,261 --
----------- ----------- -----------
7,777,712 3,793,097 1,950,864
Less valuation allowance (7,777,712) (3,793,097) (1,950,864)
----------- ----------- -----------
-- -- --
----------- ----------- -----------
Net operating loss (NOL) carryforwards of $22,738,920 expire from 2005
to 2012 for federal income tax reporting purposes and from 1998 to 2002
for state tax reporting purposes. Under current tax law a change in
ownership of a certain magnitude may limit NOL carryforwards. A change
in ownership occurred in April 1996 resulting in a limitation on the
utilization of NOL's to a maximum $1,110,780 per year of NOL's incurred
prior to April 1996. Any subsequent ownership changes, as defined in the
income tax law, could result in further limitation on the utilization of
the NOL's.
The Company has recorded a valuation allowance equal to the full value
of the deferred tax asset to reflect the uncertain nature of the
ultimate realization of the deferred tax asset based on past
performance.
-F31-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. Disclosure about the Fair Value of Financial Instruments:
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value:
Cash and Cash Equivalents
The carrying amount approximates fair value due to the short maturity of
these instruments.
Convertible Notes Payable
The fair value of the Company's $75,000 convertible subordinated note
payable is estimated by discounting the future cash flows using rates
currently available for debt of similar terms and maturity. The $500,000
convertible promissory notes were negotiated in the near term. The
carrying value of these instruments approximates fair value.
11. Supplemental Disclosure of Non-Cash Investing and Financing Activities:
During the years ended December 31, 1997, 1996 and 1995, the Company
received the following services in exchange for shares of common stock:
1997
----
Services Shares Services Shares Services Shares
Received Issued Received Issued Received Issued
-------- ------ -------- ------ -------- ------
Legal Services $127,074 25,852 $138,690 27,737 $217,000 43,083
Employee Services 87,766 15,001 20,815 4,163 7,900 1,582
Deferred Financing Costs -- -- -- -- 49,500 9,899
Other Services 37,334 17,946 106,449 25,430 66,000 13,788
Accounts Payable -- -- -- -- 3,300 400
During 1996, the Company exchanged accounts payable to shareholders for
short-term notes payable in the amount of $174,799. In addition, the
Company satisfied $100,000 of the Bridge Loan with 20,000 shares of the
Company's common stock at $5 per share.
During 1996, the Company converted its 112,750 shares of preferred stock
to 185,500 shares of common stock.
-F32-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. Supplemental Disclosure of Non-Cash Investing and Financing Activities,
continued:
Capital lease obligations incurred during 1997 and 1996 for various
machinery and equipment were $0 and $18,549, respectively.
In 1995, approximately $252,000 in employee services was received in
exchange for 50,500 common stock warrants. Also, approximately $106,000
in deferred financing costs and $34,000 in common stock offering costs
are included in accounts payable at December 31, 1995.
12. Commitments:
Operating Leases
The Company leases its facilities under long-term, noncancelable lease
agreements which have been accounted for as operating leases. The leases
require that the Company pay all property taxes, insurance costs,
repairs and common area maintenance expenses associated with its portion
of the facilities. The Company's noncancelable lease agreements expire
during 2001. The Company's future minimum lease payments under
noncancelable leases are as follows:
1998 573,453
1999 593,999
2000 616,700
2001 429,954
----------
2,214,106
----------
Rental expense charged to operations for all operating leases was
approximately $640,000, $273,000 and $202,000 for the years ended
December 31 1997, 1996 and 1995, respectively.
In February 1998, the Company entered into an agreement to sublease
office space related to the above leases, under which the Company will
receive minimum future rent of approximately $94,000 in 1998 and $8,000
in 1999.
Royalties
The Company has granted an option to a third party to purchase up to
four manufacturing licenses for certain technology under development.
The options can be exercised based on certain restrictions as defined.
Upon exercise, in addition to license fees, the Company will receive
royalties based on gross revenues from product sales. As of December 31,
1997, the options have not been exercised.
-F33-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. Contingencies:
The Company and its Telegen Display Laboratories Inc. subsidiary ("TDL")
are named defendants in a complaint (the "Complaint") filed on January
7, 1998 by IPC Corporation, Ltd., Transtech Electronics, PTE, LTD., and
IPC Transtech Display PTE, LTD (collectively, the "Plaintiffs"). The
Complaint alleges that the Company committed material misrepresentations
when the Company sold TDL common stock to the Plaintiffs for $5,000,000
on May 30, 1996. Additional named defendants include certain former
officers of the Company. The Plaintiffs seek recision of the original
purchase, complete restitution of the $5,000,000, interest, punitive
damages, costs and attorneys' fees. Neither the Company nor TDL has been
served with the Complaint and no action has been initiated against the
Company beyond filing the Complaint. The Company believes that the
Complaint is without merit and intends to vigorously defend such matter.
The Company is also subject to various legal actions and claims arising
in the ordinary course of business. Management believes the outcome of
these matters will have no material adverse effect on the Company's
financial position, results of operations and cash flows.
14. Subsequent Events:
Sale of Subsidiary
On April 1, 1998, the Company entered into an agreement to sell
substantially all of the assets of Telegen Communications Corporation,
the Company's telecommunications subsidiary ("TCC"), to an affiliate of
the Company for $500,000 and the rights of royalty streams on certain
TCC products for up to three years. The buyer assumed certain
liabilities totaling approximately $223,000. The Company has received a
deposit of $350,000 in cash as part of the sale price. The remaining
$150,000 will be paid in a note with six monthly installments of $25,000
plus interest at 6% commencing on September 15, 1998. The gain of
$133,000 was calculated without regard to the $150,000 note receivable
and royalty rights and will be recorded in the second quarter of 1998.
-F34-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. Subsequent Events, continued:
Convertible Promissory Note
On March 31, 1998, the Company received $500,000 in gross proceeds from
the issuance of a one year convertible note in connection with a Note
and Warrant Purchase Agreement. The principal balance and accrued
interest at a rate of 6% are due March 31, 1999. The principal balance
and accrued interest of the note payable are convertible after 60 days
from signing the agreements, at the holder's discretion, into common
stock of the Company at a rate of $0.38 per share, which is equal to
half of the fair market value of each share of common stock on March 31,
1998. In connection with the agreement, the holder was also issued a
warrant to purchase 1,315,790 shares of the Company's common stock for
$0.38 per share. Such warrant expires in May 1998. The discounts
resulting from the below market conversion feature will be amortized to
interest expense using the interest method over 60 days, until the
earliest conversion date.
Exchange Offer
On March 19, 1998, the Company made available to the Common Investors and
Unit Investors (Investors) an exchange offer (the "Exchange Offer") for
the common stock purchases described in Note 8. Under the Exchange Offer,
the Investors were offered convertible subordinated promissory notes (the
"Notes") for their shares of Common Stock with a face value equal to the
number of shares of common stock tendered under the Exchange Offer
multiplied by the five-day average of the Company's closing trading
prices on the OTC Bulletin Board prior to March 17, 1998 (the "Conversion
Price"). The Notes have a one-year term with a six percent (6%) balloon
interest payment due at the end of the term of the Note. The Notes are
subordinated to all other existing debt of the Company, both as to
interest and principal and upon liquidation. The Notes are also
convertible to common stock at any time by a holder thereof, such number
of shares of common stock to be determined by dividing the amount of face
value of the Note tendered by the Conversion Price. The Company may
prepay the Notes at any time after giving fifteen (15) days prior written
notice to holders thereof.
Under the Exchange Offer, 109,293 and 800,000 shares (including warrants
exercised in 1997) were exchanged for Notes by the Common Investors and
Unit Investors, respectively.
-F35-
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. Subsequent Events, continued:
In October 1997, TSC, LLC, a Delaware limited liability company ("TSC")
entered into an amended and restated stock purchase agreement with a
stockholder for the purchase of 550,000 shares of the Company's common
stock in a private transaction. In addition to the Investors described
above, the Company also made the Exchange Offer available to TSC, who
converted the 550,000 shares of common stock for the Notes.
Upon exchange of the 1,459,293 shares for convertible notes, the Company
will reduce equity and record convertible debt of approximately $724,500
during the first quarter of 1998.
15. Quarterly Results of Operations (unaudited):
The following is a summary of unaudited quarterly results of operations
for the year ended December 31, 1997 and 1996:
Quarter ended in 1997
------------------------------------------------------------
March 31, June 30, September 30, December 31,
------------ ------------ ------------ ------------
Net sales $ 159,817 $ 489,470 $ 259,926 $ 129,189
Gross profit (loss) 117,458 454,156 221,260 (82,557)
Loss before extraordinary gain (2,643,896) (3,194,228) (2,120,126) (2,497,661)
Net loss (2,643,896) (3,194,228) (2,120,126) (1,961,482)
Loss per common share attributable
to common shareholders:
Loss before extraordinary gain (0.57) (0.72) (0.49) (0.35)
Net loss (0.57) (0.72) (0.49) (0.27)
Quarter ended in 1996
------------------------------------------------------------
March 31, June 30, September 30, December 31,
------------ ------------ ------------ ------------
Net sales $ 113,517 $ 82,873 $ 199,050 $ 145,616
Gross profit 98,261 80,755 195,092 80,253
Net loss (469,995) (1,018,950) (1,304,138) (2,321,943)
Net loss per common share attributable
to common shareholders (0.15) (0.24) (0.26) (0.47)
<FN>
During the quarters ended June 30, 1997 and September 30, 1997, the Company
overstated and (understated) the accretion of preferred stock discount by
approximately $305,000 and (720,000), respectively. Accordingly, the average
common share amounts have been restated. Such restatement had the effect of
decreasing the loss per share amounts by $0.05 for the quarter ended June 30,
1997, and increasing the loss per share amounts by $0.15 for the quarter ended
September 30, 1997.
As discussed in Note 3, the Company sold all of its stock holdings in Morning
Star effective December 31, 1997. As a result, the Company recognized an
extraordinary gain of approximately $536,000 during the quarter ended December
31, 1997.
</FN>
-F36-
TELEGEN CORPORATION AND SUBSIDIARIES
------------------------------------
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
AND FOR THE YEAR ENDED DECEMBER 31, 1997
TELEGEN CORPORATION AND SUBSIDIARIES
PRO FORMA BALANCE SHEET
Unaudited
------------------------------
Pro Forma
Adjustments
-------------
Less amounts
December 31, attributable
1997, as to Telegen Pro forma
report on Communications December 31,
Form 10-K Corporation 1997
---------- ------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 275,891 $ $ 275,891
Accounts receivable:
Trade
Related parties 213,121 213,121
Other 27,813 27,813
Inventory 75,760 (75,760) --
Prepaid expenses and other current assets 17,664 17,664
---------- ------------- ------------
Total current assets 610,249 (75,760) 534,489
Property and equipment, net 1,546,183 (128,204) 1,417,979
Other assets 75,182 75,182
---------- ------------- ------------
$2,231,614 $ (203,964) $ 2,027,650
========== ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Convertible notes payable $ 75,000 $ $ 75,000
Accounts payable 1,571,104 (122,726) 1,448,378
Accrued payroll and related taxes 964,046 (100,000) 864,046
Accrued expenses 99,095 99,095
Deferred rent 46,975 46,975
Dividend payable 145,146 145,146
---------- ------------- ------------
Total current liabilities 2,901,366 (222,726) 2,678,640
Capital lease -- --
Convertible notes payable 500,000 500,000
---------- ------------- ------------
Total liabilities 3,401,366 (222,726) 3,178,640
---------- ------------- ------------
Equity put options on common stock 300,000 -- 300,000
---------- ------------- ------------
Shareholders' equity (deficit):
Common stock 16,031,336 16,031,336
Additional paid-in capital 4,133,640 4,133,640
Accumulated deficit (21,615,966) 18,762 (21,615,966)
----------- ------------- ------------
Total shareholders' (deficit) equity (1,450,990) 18,762 (1,450,990)
----------- ------------- ------------
$2,231,614 $ (203,964) $ 2,027,650
=========== ============= ============
<FN>
See accompanying notes to these pro forma financial statements
</FN>
-37-
TELEGEN CORPORATION AND SUBSIDIARIES
PRO FORMA STATEMENTS OF OPERATIONS
Unaudited
----------------------------------------------
Pro Forma Adjustments
------------------------------
For the year
ended Less amounts
December 31, Less amounts attributable to
1997, as attributable to Telegen Pro forma
report on Morning Star Communications December 31,
Form 10-K Multimedia Corporation 1997
------------ ------------ ------------ ------------
Revenues:
Sales of products $ 463,486 $ $ (463,486) --
Contract services 574,916 (574,916) --
------------ ------------ ------------ ------------
1,038,402 (574,916) (463,486) --
------------ ------------ ------------ ------------
Cost of goods sold (234,292) -- 234,292 --
Cost of contract services (93,793) 93,793 --
------------ ------------ ------------ ------------
(328,085) 93,793 234,292 --
------------ ------------ ------------ ------------
Gross profit (loss) 710,317 (481,123) (229,194) --
Operating expenses:
Selling and marketing 1,368,767 (95,949) (323,018) 949,800
Research and development 4,400,036 (1,088,337) (623,859) 2,687,840
General and administrative 5,553,209 (814,442) (1,208,081) 3,530,686
------------ ------------ ------------ ------------
Loss from operations (10,611,695) (1,517,605) (1,925,764) (7,168,326)
Other income (expense):
Interest income 29,169 -- -- 29,169
Interest expense (89,364) -- -- (89,364)
Other (109,098) -- -- (108,098)
------------ ------------ ------------ ------------
Loss before minority interests and
extraordinary gain (10,780,988) (1,517,605) (1,925,764) (7,337,619)
Minority interests in subsidiary net loss 325,077 -- -- 325,077
------------ ------------ ------------ ------------
Loss before extraordinary gain (10,455,911) (1,517,605) (1,925,764) (7,012,542)
Extraordinary gain on sale of subsidiary 536,179 -- (133,000) 669,179
------------ ------------ ------------ ------------
Net loss $ (9,919,732) $ (1,517,605) $ (2,058,764) $ (6,343,363)
Net loss per common share attributable
to common shareholders:
Basic:
Loss before extraordinary gain $ (2.11) $ (0.27) $ (0.37) $ (1.14)
Extraordinary gain $ 0.10 $ -- $ -- $ --
Net loss $ (2.01) $ (0.27) $ (0.37) $ (1.14)
============ ============ ============ ============
Diluted:
Loss before extraordinary gain $ (2.11) $ (0.27) $ (0.37) $ (1.14)
Extraordinary gain $ 0.10 $ -- $ -- $ --
Net loss $ (2.01) $ (0.27) $ (0.37) $ (1.14)
============ ============ ============ ============
Weighted average common shares outstanding 5,547,015 5,547,015 5,547,015 5,547,015
============ ============ ============ ============
<FN>
See accompanying notes to these pro forma financial statements
</FN>
-38-
NOTES TO PRO FORMA FINANCIAL STATEMENTS
1. On December 31, 1997, the Company entered into a Stock Purchase Agreement
with Morning Star Acquisition Corporation, Inc. (MAC) to sell all of the
outstanding stock of its wholly owned subsidiary, Morning Star Multimedia, Inc.
(MSM) to MAC for $200,000 and for royalty streams to be paid to the Company for
a period of two (2) years from December 31, 1997 of Ten Percent (10%) and Five
Percent (5%) of certain gross sales of MSM.
In addition, on April 1, 1998, the Company entered into a agreement to sell
substantially all of the assets of Telegen Communications Corporation, the
Company's telecommunications subsidiary (TCC), to an affiliate of the Company
for $500,000 and the rights of royalty streams on certain TCC products for up to
three (3) years. The buyer assumed certain liabilities totaling approximately
$223,000. The Company has received a deposit of $350,000 in cash as part of the
sale price. The remaining $150,000 will be paid in an note with six monthly
installments of $25,000 plus interest at 6% commencing on September 15, 1998.
The gain of $133,000 was calculated without regard to the $150,000 note
receivable and royalty rights and will be recorded in the second quarter of
1998.
In accordance with Rule 11.02 under Regulation S-X certain pro forma Financial
information is required to be presented herein. The Pro Forma Balance sheet is
as of December 31, 1997, which is the most recent date for which a consolidated
balance sheet of the Company was filed. The Pro Forma Statements of Operations
have been prepared as of December 31, 1997, the most recent fiscal year.
2. The Pro Forma Statement of Operations for the year ended December 31, 1997
reflect the removal from the Company's reports for such period the portion of
sales and expenses attributable to the operation of MSM and TCC previously
consolidated in the Company's financial statements, resulting in pro forma
statements of operations for such period as if MSM and TCC had not been a
subsidiaries thereof for such period.
3. The Pro Forma Balance Sheet as of December 31, 1997, reflects adjustments to
the asset, liability, and equity accounts as previously reported by the Company
by removing the applicable portions of Telegen Communications Corporation's
assets, liabilities, and equity positions.
-39-
Exhibit Number Description Page
- -------------- -------------------------------------------------------------- -------------
2.1* Stock Purchase Agreement Among Morning Star Acquisition, Inc.,
Morning Star Multimedia, Inc., and Telegen Corporation dated
December 31, 1997
2.2 Asset Purchase of TCC Agreement by and between Synercom, Inc.
and Telegen Corporation dated April 1, 1997
Certain exhibits and schedules to Exhibit 2.2 are listed on
page 23 thereto and the Registrant agrees to furnish them
supplementally to the Securities and Exchange Commission upon
request.
3.1** Articles of Incorporation of Telegen Corporation dated August
30, 1996 [formerly known as Solar Energy Research Corp. of
California]
3.2** Certificate of Amendment to the Articles of Incorporation of
Telegen Corporation dated October 28, 1996 [formerly known as
Solar Energy Research Corp. of California]
3.3+ Certificate of Determination with respect to the Company's
outstanding Series A Preferred Stock filed with the California
Secretary of State on March 20, 1997
3.4** Bylaws of Telegen Corporation
3.5 Certificate of Amendment of Bylaws effective August 6, 1997
4.1 Form of Convertible Promissory Note issued by the Company in
November 1997
10.1** Service Agreement between MCI Telecommunications Corporation
and Telegen Communications Corporation
10.2** Agreement among Telegen Communications Corporation, Telegen
Display Laboratories, Inc., Transtech Electronics Pte, Ltd.,
and IPC Corporation, Ltd., dated May 30, 1996
Exhibit Number Description Page
- -------------- -------------------------------------------------------------- -------------
10.3** Manufacturing License Agreement among Telegen Communications
Corporation, Telegen Display Laboratories, Inc., Transtech
Electronics Pte, Ltd., and IPC Corporation, Ltd., dated May
30, 1996
10.4** Lease Agreement between Metropolitan Life Insurance Company
and Telegen Corporation for premises located in Foster City,
California
10.5** Lease Agreement between Metropolitan Life Insurance Company
and Telegen Corporation for premises located in Redwood City,
California
10.6** Warrant Certificate of Telegen Display Laboratories, Inc. by
and between Telegen Display Laboratories, Inc., and W. Edward
Naugler, Jr., to purchase 500,000 shares of Common Stock of
Telegen Display Laboratories, Inc.
10.7** License and Stock Purchase Agreement by and between Telegen
Communications Corporation and Telegen Display Laboratories,
Inc. effective as of May 2, 1996
10.8*** Shareholder Agreement between Janmil Holdings PTE LTD and
Telegen Communications Corporation dated June 4, 1997
10.9+ Subscription Agreement For 8% Convertible Preferred Stock by
and between Telegen Corporation and Silenus Limited dated
March 24, 1997
10.10++ Amendment Agreement to 8% Convertible Preferred Stock of
Telegen Corporation dated July 22, 1997
10.11 Form of Subscription Agreement for the Company's Common Stock
financing August, 1997
10.12 Form of Subscription Agreement for the Company's Common Stock
and Warrant Financing October, 1997
10.13 Form of Subscription Agreement for the Company's Convertible
Note and Warrant Financing November, 1997
10.14 Form of $2.25 Warrant issued to certain purchasers in the
Common Stock Financing August, 1997
10.15 Form of $4.00 Warrant to Purchase Common Stock issued by the
Company to certain purchasers in the Common Stock and Warrant
Financing October, 1997
10.16 Form of $0.01 Warrant to Purchase Common Stock issued to
certain purchasers in the Common Stock and Warrant Financing
October, 1997
Exhibit Number Description Page
- -------------- -------------------------------------------------------------- -------------
10.17 Form of $2.25 Warrant to Purchase Common Stock issued by the
Company to certain purchasers in the Convertible Note and
Warrant Financing November, 1997
10.18 Employment Agreement by and between the Company and Jessica L.
Stevens dated May 3, 1990
10.19 Employment Agreement by and between the Company and Bonnie
Crystal dated May 4, 1990.
10.20 Employment Agreement by and between the Company and Warren M.
Dillard dated November 1, 1993.
10.21 Employment Agreement by and between the Company and Fred Y.
Kashkooli dated October 31, 1997
10.22 Exchange Offer Agreement by and between the Company and
certain holders of Common Stock dated March 24, 1998
11.1 Statement Re Computation of Per Share Earnings
12.1 Statement Re Computation of Ratios
21.1 Subsidiaries of the Registrant
24.1+++ Power of Attorney
27.1 Financial Data Schedule
<FN>
* Incorporated by reference herein to the 8-K filed by the Registrant on
January 15, 1998
** Incorporated by reference herein to the 10-K filed by the Registrant on
March 31, 1997 and amended on April 9 and April 30,1997
*** Incorporated by reference herein to the 8-K filed by the Registrant on July
8, 1997
+ Incorporated by reference herein to the 8-K filed by the Registrant on
March 25, 1997
++ Incorporated by reference herein to the 8-K filed by the Registrant on
August 11, 1997
+++ Incorporated by reference in the signature page herein.
</FN>