TELEGEN
Part I
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ITEM 1. BUSINESS OF TELEGEN
Telegen Corporation ("Telegen" or the "Company") is a diversified, high
technology company with products, both developed and in development, in the
telecommunications and internet hardware, flat panel display and multimedia
markets. At present, Telegen is organized into three subsidiaries and one
division. 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, develops manufactures and markets
a line of intelligent telecommunications and internet products, providing
additional features to existing telephone equipment used by consumers and small
businesses. Morning Star Multimedia Inc., a New Jersey Corporation ("MSM"), a
wholly-owned subsidiary of the Company, is a creator and supplier of interactive
CD-ROM and internet-based edutainment, infotainment and entertainment programs
and software. The Telegen Laboratories division is a research organization which
develops new products and technologies which are then manufactured and marketed
through one of the operating divisions or subsidiaries. Telegen's corporate
offices are located at 101 Saginaw Road, Redwood City, CA 94063, (415) 261-9400.
Telegen was incorporated in California on August 30, 1996. In the year
ending December 31, 1996, certain significant developments occurred. On October
28, 1996 the Company completed its merger with Solar Energy Research Corp., a
Colorado corporation ("SERC") and became a public reporting company. During the
course of this merger, SERC was redomiciled to become a California corporation,
Telegen changed its name to TCC and the entity formerly known as SERC changed
its name to Telegen. Ownership in the new merged entity was 97% by former
Telegen shareholders and 3% by SERC shareholders. On December 27, 1996 the
Company completed its acquisition of MSM. In return for all the capital stock
of MSM, Telegen issued the three shareholders of MSM a total of 133,333 shares
of Telegen Common Stock.
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 visual characteristics, relative ease of
manufacturing and low costs of this technology 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 its technology can 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's High Gain Emissive Display, or HGED is a full color, high
resolution, high brightness, and high contrast flat panel display which can be
produced in sizes ranging from 10 inch, notebook computer size to full, large
screen television size of up to 40 inches. The relatively inexpensive HGED
technology produces the same or better performance than the bulky, heavy and
high voltage cathode ray tube (CRT) used in television sets, but in a flat, low-
weight package.
Telegen plans to retain at least a 50% ownership in any joint venture and
has determined to keep all development, funding, and management of the flat
panel display technology independent from its telecommunications activities. To
facilitate this, Telegen created TDL. Telegen believes that HGEDs exceed the
performance of active matrix liquid crystal displays, or AMLCDs, which are
currently the premium laptop computer display and costs the consumer an average
of $1,000 above the monochromatic displays and low performing, passive color
displays. The HGED has been fabricated in 6" diagonal, full color, full gray
scale prototypes which run a standard NTSC (television standard) signal from a
computer. 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 HGED has substantial value, potentially exceeding
that of all of its telecommunications products. Telegen is in active discussion
with several prospective strategic partners to obtain substantial new capital in
the form of either equity investment in TDL or project financing, which TDL will
need to develop plant and product specifications, and to build a pilot
production facility. TDL's initial production 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 limited production line in new facilities in
1998 which could produce up to 60,000 displays per year, and to build a full
scale production plant (one million displays per year capacity) in 1998/1999
with the proceeds from a future funding. Further, 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.
Display Patents. In December 1995, Telegen filed for its first U.S. patent
(of an estimated total of seven) on the basic HGED 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. Although it is difficult to precisely project the capital
costs for establishing a high volume manufacturing facility, Telegen's initial
estimates indicate its technology could lower the display business entry cost
from $1 billion to less than $50 million for a facility which can produce one
million 20 inch diagonal flat panel displays per year.
Flat Panel Market. The flat panel display market today generates
approximately $12 billion in sales and is predicted by industry sources to grow
to greater than $20 billion by the year 2000. Since Telegen anticipates that an
HGED display may cost less than 20% of 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 HGED 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 the HGED costs. HGED costs are
derived from a careful analysis of (i) the cost of components and materials,
most of which come from
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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 gained from assembly of HGED
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 HGED 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
13" diagonal and cost from $15-$17 per square inch to manufacture.
Several Japanese companies have recently introduced a color plasma driver
liquid crystal display ("LCD") flat panel display of 40" diagonal size which
will soon be available in the U.S. for $10,000 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 SI Diamond Technologies,
Inc., 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 HGED 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.
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 is currently developing interactive CD-ROM
multimedia software relating to the "Casper" movie by Steven Spielberg based
upon an adventure through Whipstaff Manor. Additionally, scheduled for release
in 1997 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 oriented record keeping and nutritional planning by helping
the dieter plan and track meals with easily produced 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. Scheduled for completion in late 1997 is
"Europa Universalis I," which is a computerized, interactive multimedia version
of a popular European board game in which players can assume the role of
monarchs of leading states of Europe during the period 1492 - 1792. During
1996, all of MSM's sales were under contract for Internet "Europa Universalis I"
and web pages.
Principal Markets. MSM targets its development and marketing efforts to
serve the following markets: (i) boys and girls age 6-12 who love cartoons and
animation; (ii) nutritionally conscious men and women age 15-55; and (iii) boys
and girls who love science, role playing and various hobbies. MSM faces
material competition in segments
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of these markets, and markets its products primarily through super stores,
"Software Only" stores, mass merchandising and mail order. Each of the following
product classes produced by MSM taken individually, comprise more than 15% of
combined revenue: entertainment CD-ROMs, personal productivity, movie and
recording industry CD-ROMs and the rendering of multimedia development services.
The interactive multimedia CD-ROM market is divided into two main
classifications--by software category and by format. By software category, the
market may be segmented into business, education, finance, games and personal
reference. By format, the market may be segmented into CD ROM and all other
medium (i.e. floppy disks, etc.)
MSM endeavors to acquire popular, well-known licenses with widespread brand
awareness, and regularly seeks to gain exclusive control over all licenses and
intellectual properties upon which its products are based. MSM's product sales
materially vary according to the different seasons, with a significant portion
late in the year for the Christmas season. MSM strategically designs its product
mix to cross over into many segments of the software industry, thereby providing
a balance that minimizes the effect of a downward shift in demand in any one
market segment.
Methods of Distribution. MSM sells its software though a distribution
agreement with an appropriate software distribution company enabling MSM to
become an affiliate publisher with the distribution company. MSM's customers
are accustomed to buying from the following kinds of retailers (in preference
order): (i) by dollar volume -- super stores, software only, mass merchandisers
and mail order; and (ii) by unit volume -- software only, super stores, mass
merchandisers and mail order.
Competition. MSM competes in two sectors of the interactive multimedia
development and publishing business. Specifically, these areas are: (i)
development and affiliate publishing of interactive multimedia CD-ROMs; and (ii)
interactive multimedia Internet website content development. MSM's primary
competition comes from small to intermediate-sized affiliate publishers and
developers of CD-ROMs and Internet websites. In the CD-ROM publishing market,
the current leaders against which MSM competes consists of large companies like
Microsoft, Broderbund, Softkey, Sierra On-Line, Electronic Arts, LucasArts,
Intuit, GT Interactive, Davidson and Virgin. In the gaming market segment, MSM
competes with these same entities along with Interplay, Maxis and Microprose.
In the education market segment, MSM competes with Softkey, Davidson,
Broderbund, Disney Interactive, MECC, Living Books, Microsoft, Edmark, Mindscape
and Sierra On-Line. MSM competes with these companies primarily on the bases of
competitive pricing, customer service (largely technical support) and dealer
promotional support through selling and sales promotional practices.
MSM expends all of the cost of development of its products in advance
except for the physical manufacture of products such as floppy disks and CD-ROMs
with packaging. Thus, significant risk is taken with regard to the investment
prior to final determination of market acceptance and value of the output. MSM
presently has only two established customer relationships by contract: (i)
Target Company, a Swedish game company, and (ii) Weight Watchers(R). MSM
presently has no backlog nor does it depend on government contracts.
Telegen Communications Corporation
The consumer electronics market is one of the fastest growing segments of
today's economy. The consumer electronics industry swept into the decade of the
1980's on a substantial trend toward technology with a new generation of home
and commercial products, all made possible by the microprocessor chip. This
trend has continued into the 1990's as more products continue to be introduced
that impact the lives and lifestyles of consumers.
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Within the Consumer Electronics industry, the information delivery market
has enjoyed rapid growth fueled, to a large extent, by the substantial demand
for easy, quick and low cost access to information. The home and small business
information equipment market itself is estimated by industry sources to
currently be a $25 billion annual market. This market includes
telecommunications products such as telephone equipment, wireless communications
and Internet access products. Telegen expects the telephone equipment portion of
the consumer electronics market to grow at a faster rate than the overall
economy throughout the balance of the 1990's.
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.
In the small business market, the local telephone companies have discovered
a large market for a low-cost, easy-to-install telephone system for offices with
less than 20 lines. This service, known as "Centrex" or "Comstar", provides the
basic functions of Call Pickup, Call Transfer and Conference Calling to
businesses with as few as 2 lines. With small PBX systems costing around
$2,000, Centrex/Comstar, at installation costs of up to $100 per line and
monthly charges of under $35 per extension, provides small business with a
comparatively cost effective solution. This calculates to a total cost for a 4-
line typical Centrex installation over a 5-year period of approximately $8,800.
Since most small businesses cannot afford the up-front cost of installation of a
traditional PBX, Centrex/Comstar has remained the only solution to their needs.
In California alone, there are over 1.4 million Centrex lines in service today.
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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.
The advent of Caller ID services offered by various phone companies across
the U.S. and the hardware necessary to utilize such services, is further raising
the consciousness of consumers and businesses to the expanding ways they can use
the telephone as an information tool.
Caller ID allows the recipient of a call, with proper equipment, to know
the caller's telephone number whether listed or unlisted (and with some
equipment, the Caller's name) before accepting the call. This scenario brings
up some serious privacy issues. Telegen's ID Blocker is a device designed to
selectively block the transmission of a caller's identity to a telephone capable
of identifying the telephone number of the calling party. ID Blocker does not
interfere with 911 calling number delivery.
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 products, a series of four (4)
outgoing telephone call restrictors known as "TeleBlocker". These accessories,
priced at $49.99, provide consumers and small businesses with the ability to
restrict outgoing telephone usage in order to control costs. The most advanced
version, the TeleBlocker Plus, incorporates 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. This capability allows even the most
complicated products to be set-up and installed, without the need of a user's
manual by the average consumer. TCC believes that this patented
capability is not available in other comparably-priced programmable consumer
products and allows the marketing of products previously considered too
complicated for the mass market.
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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."
Remote Programming System ("RPS"). All programmable TCC products are
capable of being programmed and serviced over the telephone lines from the TCC
Customer Service Center using the RPS. The TCC Customer Service Representative
is able to diagnose the unit remotely over the telephone line while the customer
is still on the line. The representative is then able to download any
programming appropriate to the specific unit over the telephone line while the
customer is still on the line. TCC believes this feature is a unique technology
for inexpensive programmable consumer products. The RPS also provides the
ability to support other types of electronic products attached to the telephone
lines and could be licensed to third party manufacturers for this purpose. See
"Licensing."
Parallel Technology. 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.
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Current distribution channels for TCC's TeleBlocker products include the
RBOCS, specialty catalogs and other distributors, such as retail phone stores.
In addition, TCC has access to several RBOCs to sell its products through retail
catalog and telemarketing channels. Other distribution arrangements include
agreements with specialty mail order catalogs such as Sharper Image.
TCC has previously, and expects again to enter into distribution
agreements with large national equipment distributors such as C & L
Communications, Inc. and Advantage Telecom Supply, who are distributors to
smaller long distance carriers and to "value-added resellers" of
telecommunications equipment to the small business market. These distribution
channels will be key in the marketing of the MLD 1000 and ACS 2000 into the
traditional telecom industry. For the fiscal year ended December 31, 1996,
total sales of telecom products were $23,700.
TeleBlocker. TCC believes that, based upon its marketing research,
although there are directly competing products or services available in this
market, its TeleBlocker products offer significant feature advantages over the
available competing products. TCC also believes its products are superior in
quality and have advantages over the competition such as cost controls, ease of
use, performance and Parallel Control and RPS capabilities.
ACS Devices. There are limited alternatives to ACS for single line
telephones. For example, Hy-Tek Controls, Inc. sells one and two line dialers
which route calls to long distance carriers. However, they differ substantially
from TCC's in that they are (1) only in-line series, (2) are not parallel (one
device for all telephone instruments), (3) are programmed manually through the
telephone keypad, a process that can take up to 1 hour (as opposed to TCC's RPS
in 5 minutes or less) and (4) retail at prices of 2-3 times the retail price of
the ACS. TCC
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believes that there are no other devices which operate in parallel or that are
supported and programmed by a system comparable to RPS.
Multi-Line Device ("MLD"). The principal competition to TCC's MLD is a
four-line programmable dialer made by Mitel Corporation called the "Mitel Smart
One." This is a unit that has been on the market in various versions for about
ten years. TCC believes that the "Mitel Smart One" is more difficult and costly
to install and program than the MLD, as well as lacking expendability. Also,
unlike the MLD, it is incompatible with calling patterns in certain areas of the
country. TCC believes this, along with its ease of programming via RPS,
provides the MLD product with a significant competitive advantage in those
areas. A four line dialer similar to that of Mitel is offered by IQtel, Inc.
It has similar installation features and disadvantages as compared to TCC's MLD
as does the Mitel Smart One.
ID Blocker. TCC knows of only one automatic consumer device currently
available which competes with its ID Blocker. That device is priced higher than
the expected retail price of TCC's ID Blocker. TCC believes that most consumers
concerned about privacy where Caller ID is available are currently limited to
manually inserting the "*67" blocking code as called for by the Local Exchange
Carrier. There are also a few states which permit the consumer to block all
outgoing Caller ID information on a "per-line" basis. Most states with Caller ID
service do not offer that capability to consumers and the FCC has not mandated
it for inter-state Caller ID.
TCC has established a corporate policy to actively explore licensing
opportunities for both its products and technologies. TCC has a number of
proprietary technologies, for which it has secured either patent or trade secret
protection, and which TCC believes are licensable. Chief among these are the
Parallel Technology (as used in ACS) and the RPS technology (used in all TCC
programmable products). These technologies can be used to enhance or develop a
wide variety of products. TCC has had discussions with a number of companies
regarding licenses for these and other technologies, and believes that the
issuance of the US Patent for the Parallel Technology and RPS Technology,
greatly enhances licensing opportunities. TCC has also been approached by a
number of manufacturers to sell or license the ACS technology for incorporation
into finished telephones.
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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. TCC has had a manufacturing
relationship with Crystal Field since May 1991 and believes it has adequate
capacity through Crystal Field to meet TCC's requirements for the next year.
TCC contracts with Crystal Field on a purchase order basis without a long-term
supply arrangement. TCC does not currently have alternative capabilities to
manufacture its products under contract, either internally or through third
parties but has been offered such capabilities from other manufacturers with
equal quality and competitive pricing. In the event that there were an
interruption of production or delivery, TCC's ability to deliver products in a
timely fashion would be compromised, which would materially adversely affect
TCC's results of operations. TCC believes that having a second manufacturing
source will limit the effects of any regional component shortages, potential
transportation problems and manufacturing capacity limitations. Several
qualified assembly facilities located in the United States and the Far East have
been identified as alternative manufacturers. Those located abroad are cost-
competitive with Crystal Field.
Telegen Research and Development
Telegen's research and development expenses for the years ending December
31, 1996, 1995 and 1994 were approximately $2,386,331, $842,026 and $830,913
respectively. Telegen estimates that its total expenditures for research and
development will aggregate at least $4,000,000, including the flat panel display
(HGED), during 1997. Much of the Telegen Display Laboratories portion of R&D,
which totals about $1,416,540, is equipment and related overhead costs. In 1993,
Telegen's initial primary research and development activities included the AT&T
Call Controller 9050. In 1994 and 1995, Telegen's research and development
activities included work toward the development of ACS, MLD and other products
not yet introduced. Continued development of enhancements of the ACS and MLD
products as well as the flat panel display technology will be significant
relative to Telegen's near term sales. This was a drain on Telegen's resources
during 1996, but Telegen believes that its investment in research and
development may generate positive cash flow in late 1998. There can be no
assurances, however, that such investment in additional research and development
will result in products that are commercially successful or profitable.
Telegen's strong emphasis on new product and technology research and
development will command management's primary attention through 1997 and much of
1998. 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
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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 the ACS
product line.
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. A broad patent related to ACS was
issued in 1996.
Telegen Display Laboratories filed its first very broad and basic US patent
on the HGED in December 1995, its second in December 1996 and plans to file
several more key patents on a continuing basis.
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. Additionally, all
microprocessor-based products (including all of Telegen's product line), must
conform to FCC Rules, Part 15, as applied to radiated interference.
Telegen retains the services of a communications consultant, who has
advised and assisted Telegen throughout the design process regarding FCC
compliance. In addition, Telegen's Executive Vice President, Bonnie Crystal,
has extensive experience in communications engineering to meet the requirements
of FCC regulations.
Telegen has submitted the TeleBlocker and ACS series of products to an
independent testing laboratory accredited by the FCC for compliance with
applicable interconnect rules. Telegen received such approvals for the
TeleBlocker product in January 1991. The ACS product received such approvals in
May 1994. Telegen believes that all other contemplated products as designed
will have to meet applicable FCC regulations, including MLD, which is currently
under such review and expected to be approved shortly.
At this time, of the Telegen products, only the A/C adapter which provides
the power to Telegen's products described above requires UL approval. These
adapters are purchased as an off-the-shelf component and already are UL
approved. However, at the request of AT&T, the Call Controller 9050 was tested
by and received UL listing.
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The TeleBlocker meets all UL standards but has not been submitted for such
approval. At the request of MCI, in August of 1995, the ACS product was tested
by and received UL listing. MLD will similarly require such approval, which
Telegen does not expect to have difficulty obtaining.
Employees
Telegen currently employs 80 persons on a full-time basis, including three
executive officers, 15 software programmers and hardware engineers, two
marketing and sales employees, and a general support staff. Telegen considers
that its relationship with its employees is positive. 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.
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, Telegen Display Laboratories, Inc. Another
subsidiary of the Company, Morning Star Multimedia, Inc., is located at 29
Ridgewood Ave., Ridgewood, New Jersey.
The Redwood City facilities include 38,000 square feet of office space at a
cost of approximately $45,000 per month plus Telegen's respective share of the
building's operating expenses. Telegen believes that there is adequate space
available in the new 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
In August 1991, Telegen's subsidiary TCC issued an aggregate of 208,592
shares of Common Stock to Sahara Associates, Inc. ("Sahara") in connection with
a letter of credit and related financing to be obtained by TCC. A letter of
credit in the amount of $300,000 was issued in favor of TCC by Bank Sadarat but
TCC was unable to realize any benefit from such a letter of credit. In September
1992, Bank Sadarat filed a complaint against TCC in the Superior Court of the
State of California for the County of San Mateo for approximately $110,000
advanced under a separate letter of credit. In March 1993, TCC canceled the
208,592 shares issued to Sahara and filed a cross-complaint for declaratory
relief against Sahara and others. In that action, TCC sought a judicial
declaration that the issuance of the aforementioned shares was void for lack of
consideration, that the action of TCC in canceling such shares was valid and
that the persons to whom such shares were issued have no rights as shareholders
of TCC. The case was removed to the Federal District Court for the Northern
District of California. In July 1996, TCC settled Bank Sadarat's claim by paying
Bank Sadarat $100,000, which is less than the liability for the Bank Sadarat
claim that is reflected in TCC's Financial Statements which are incorporated by
reference herein. The dispute with Sahara regarding the canceled shares has not
yet been resolved. Although the number of shares and percentages of the
outstanding shares referred to in this Registration Statement reflect the
cancellation of shares issued to Sahara, there can be no assurance as to the
ultimate result of the litigation with Sahara.
-12-
PART II
-------
ITEM 5. MARKET FOR COMMON EQUITY
There is presently a market for Telegen's common stock on the NASDAQ Small
Cap Market under the symbol "TLGN." Telegen expects to become eligible for
listing on the NASDAQ National Market System sometime in the future, but there
can be no assurance that this will happen. Telegen has been listed on the
NASDAQ Small Cap Market since November 1996 and Telegen's stock traded at a
high of 21 and a low of 8 during the remainder of 1996. Telegen's outstanding
common stock is held by 3,290 shareholders and there is one shareholder who
purchased Telegen preferred stock in March 1997. No dividends were paid to
Telegen's shareholders during the last fiscal year and Telegen does not
anticipate paying dividends in the future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Ananlysis 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,
----------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
1996 1995 1994 1993 1992
Revenues ------- ------- ------- ------- -------
Sales $ 23,700 $145,795 $432,972 $498,358 $162,447
Services 517,356 0 0 0 0
Total revenues 541,056 145,795 432,972 498,358 162,447
Cost of Revenues
Sales 18,083 170,421 314,239 296,285 55,544
Services 68,612 0 0 0 0
Total Cost of Revenues 86,695 170,421 314,239 296,285 55,544
Gross profit 454,361 (24,626) 118,733 202,073 106,903
Operating Expenses
Sales and marketing 439,350 89,275 92,170 29,980 11,007
Research and development 2,386,331 842,026 830,913 37,955 9,317
General and administrative 3,043,530 1,506,531 1,118,312 294,526 103,277
Total operating expenses 5,414,850 2,437,832 2,041,395 362,461 123,601
Income (loss) from operations (5,414,850) (2,462,458) (1,922,662) (160,388) (16,698)
Other income, net 194,443 725 9,608 3,154 0
Interest Expense 146,650 81,105 30,658 11,488 13,433
Minority Interset 252,031 0 0 0 0
Income (loss) before provision
for taxes (5,115,026) (2,542,838) (1,943,712) (168,722) (30,131)
Provision for income taxes 0 0 0 0 0
Net income (loss) (5,115,026) (2,542,838) (1,943,721) (168,722) (30,131)
Net income (loss) per share (1.16) (0.88) (0.70) (0.07) (0.01)
Shares used in per share calculation 4,418,099 2,882,961 2,785,957 2,294,627 2,075,582
BALANCE SHEET DATA
Working capital (deficit) 2,702,061 (1,794,634) (390,017) 827,517 (349,707)
Total assets 5,727,322 935,788 566,952 1,398,635 127,303
Notes payable and capital lease
obligations less current portion 18,549 167,649 178,976 151,090 172,796
Accumulated deficit (10,441,795) (5,326,769) (2,763,931) (840,219) (671,497)
Stockholders' equity (deficit) 4,091,163 (1,589,540) (321,485) 381,088 867,947
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 therto included elsewhere in this report.
Telegen was organized and commenced operations in May 1990. From inception
until 1993, Telegen was principally engaged in the development and testing of
its products. Telegen's first product sales and revenues were realized in 1991.
Revenues in 1991, 1992, 1993, and 1994 were derived primarily from sales of
Telegen's TeleBlocker products and in 1995 from its ACS products. In 1996,
revenues were derived primarily from the operations of MSM. Telegen has
incurred significant operating losses in every fiscal year since its inception,
and, as of December 31, 1996, Telegen had an accumulated deficit of $10,441,795.
As of December 31, 1996 Telegen has working capital of $2,702,061. Telegen
expects to continue to incur substantial operating losses through 1997. In order
to become profitable, Telegen must successfully increase sales of its existing
products, develop new products for its existing markets and for new markets,
increase gross margins through higher volumes and manufacturing efficiencies,
manage its operating expenses and expand its distribution capability.
Telegen has made significant expenditures for research and development of
its products, and for the establishment of its sales and marketing operations.
In order to remain 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 substantial expansion in
Telegen's revenue base.
-13-
Results of Operations
Revenues. Revenues for 1996 were $541,056, compared to $145,795 for 1995,
$432,972 for 1994 and $498,358 for 1993. 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. In 1994 TCC
experienced a significant delivery of Call Controllers to AT&T, representing a
non-recurring revenue infusion of $254,297. Excluding the Call Controller sale
to AT&T, TCC 1994 revenues consisted primarily of sales of Teleblockers. TCC's
Teleblocker product which made up the bulk of revenues for 1994 and the first
half of 1995 was taken off the market in June of 1995 for redesign. The
redesigned Teleblocker product is being returned to the market in the spring of
1997.
Cost of Goods Sold. Cost of goods sold and contract services was $86,695
for the year ended December 31, 1996 and $170,421 for the year ended December
31, 1995. Cost of goods sold for 1996 consisted of $68,612 for revenues derived
from Morning Star Multimedia 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. Cost of goods sold for 1994 were $314,239,
compared to $296,285 for 1993.
Research and Development. Research and development expenses were
$2,386,331 for the year ended December 31, 1996, $842,026 for the year ended
December 31, 1995, $830,913 for the year ended December 31, 1994 and $37,955 for
the year ended December 31, 1993. 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. Prior to 1995 all research and development expenses were
attributable to TCC. Lower expenses for TCC in 1996 were the result of
completion of development of the ACS product. The increase in years 1994 and
beyond as compared with 1993 was primarily due to creation of a full-scale
research and development division, Telegen Laboratories.
Sales and marketing. Sales and marketing expenses for the year ended
December 31, 1996 were $439,350 compared with $89,275 for the year ended
December 31, 1995, $92,170 for the year ended December 31, 1994 and $29,980
for the year ended December 31, 1993. 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. Prior to 1995 all sales and marketing expenses were
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. Reduced expense for 1995 as compared to 1994 was largely attributable to
a reduction in the marketing staff in mid-1995. Increased costs from 1993 to
1994 were primarily due to an increase in promotional expenses related to the
introduction of Telegen's Call Controller products and initial marketing of
ACS. In late 1993 Telegen hired a Director of Telecom Products (its first full-
time sales staff position).
General and Administrative. General and Administrative expenses for 1996
were $3,043,470 as compared with $1,506,531 for 1995, $1,118,312 for 1994 and
$294,526 for 1993. 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. Prior to 1995 all general and administrative expenses were
attributable to TCC. 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,
-14-
the amortization of bridge loan expenses, the relocation of Telegen to a new and
larger facility. The primary components of general and administrative expenses
for 1995 and 1994 were employee salaries and legal and accounting expenses. The
increase in general and administrative expenses for 1994 as compared to 1993
were related to expanded facilities and significant staff increases.
Interest Income and Expense. Net interest income for 1996 was $47,793 as
compared with net interest expense of $80,380 for 1995, net interest expense of
$21,050 for 1994 and net interest expense of $8,334 for 1993. 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. Increases in interest income for 1996 for TDL
and TCC/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 and 1995 were the direct
result of bridge loan expenses; the bridge loans were paid of in May 1996 from
the proceeds of a private placement completed in April 1996. The increase in
net interest expense from 1993 to 1994 was due to the incurring of debt in late
1992 and 1993, which remained outstanding throughout 1994.
Liquidity and Capital Resources
Telegen has funded its operations primarily through private placements of
its equity securities with individual investors. As of December 31, 1996,
Telegen had raised $10,122,411 in net capital through the sale of Telegen common
stock, and $4,605,010 in net capital through the sale of TDL common stock. In
February 1996, Telegen initiated a private offering of its common stock at $5.00
per share. Through May 1996, when the offering was completed, Telegen had
received gross proceeds from this offering of approximately $6,671,950 for the
issuance of 1,334,390 shares of common stock and paid approximately $1,023,695
in placement agent fees. A portion of the proceeds from the offering in the
amount of $715,000 was used by Telegen to repay in full the one-year promissory
notes related to $715,000 in Bridge Financing provided through the issuance of
one-year notes and 34,892 shares of Telegen's common stock. Additionally,
Telegen completed in March 1997 a private placement of a new Series A
Convertible preferred stock which will result in $3.6 million in net proceeds to
Telegen, of which, $2.5 million was received in March, 1997.
Due to the unavailability of cash resources for operations, Telegen issued
57,330 shares of common stock, 119,252 shares of common stock and common
stock equivalents and 63,241 shares of common stock during 1996, 1995 and 1994,
respectively, in lieu of cash as payment for certain operating expenses,
primarily legal fees and employees services, amounting to $265,954, $596,200 and
$274,000, respectively.
In May 1996, Telegen formed Telegen Display Laboratories, Inc. ("TDL"), a
subsidiary for the development and commercialization of High Gain Emissive
Display ("HGED") 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 an investment in TDL of $5,000,000.
Along with its investment in TDL, IPC-Transtech acquired an option to purchase
licenses to build up to four flat panel display production plants in exchange
for aggregate fees of up to $40 million plus royalties of 10% of the gross
revenues from the sale of HGED displays by IPC-Transtech. In connection with
this transaction, TDL paid $400,000 in broker fees.
A full scale production plant for the flat panel display is currently
estimated to cost $50 million for equipment, $10 million in plant infrastructure
plus working capital of about $30 million, or a total of about $90 million.
This is in addition to the real property, which is expected to be leased.
Telegen does not have these funds available 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 venture partner who would then be a
co-owner of the plant or (2) through a future public offering of stock. Even if
such funding can be obtained, which cannot be assured, it is
-15-
currently estimated that a full scale production plant could not be completed
and producing significant numbers of flat panel displays before 1998.
However, Telegen is currently contemplating entering into license
agreements with a number of large enterprises, such as IPC-Transtech,
to manufacture the displays. The manufacturers would also have the
attributes of established manufacturing expertise, distribution sources to
assure a ready market for the displays and established reputations of 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 1997, or any significant production of displays thereunder before
June 1998.
Telegen is currently building a limited production line which will have the
capacity to manufacture an adequate number of marketable displays to produce
significant revenues and positive net income and cash flow before the end of
1998. The cost of that production line is estimated to be about $5 million.
Telegen's other future capital requirements will depend upon many factors,
including the timing of acceptance of Telegen's products in the market, the
progress of Telegen's research and development efforts, Telegen's operating
results and the status of competitive products. Telegen anticipates that its
existing capital resources including expected future, scheduled funding of
Series A Preferred Stock, and revenues from operations will be adequate to meet
Telegen's forecasts through 1998. Thereafter, Telegen expects that further R&D
of its Telecom and Internet products will be funded from operating income. As
discussed above, Telegen's current commitments for capital expenditures is
related to the purchase of equipment which is required to establish a laboratory
for its subsidiary TDL and a limited, prototype production line for the flat
panel display. TDL will require significant additional capital to move into a
manufacturing phase. The total amount of funds expected to be required to build
that limited production line is approximately $5 million.
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. Therefore, there can be no assurance that Telegen will not
require additional equity or debt financing within twelve months following
completion of the Acquisition.
Telegen anticipates incurring substantial costs for research and
development, sales and marketing activities, and an increase in production
capability in 1997. Management believes that constant efforts to improve
existing products and develop new 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 1997.
Telegen estimates that its total expenditures for sales and marketing will
aggregate over $1,000,000 during 1997. All such funds outlined above are
presently available to Telegen.
ITEM 8. FINANCIALS & SUPPLEMENTARY DATA
The information required by this Item is set forth in the Company's
Financial Statements and Notes thereto begining at page F-1 of this report.
-16-
ITEM 9. TELEGEN CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Cordovano & Company, P.C., was replaced as Telegen's principal accountant
due to the merger of Telegen with TCC, on October 28, 1996 (the "Merger").
Coopers & Lybrand L.L.P. , has been engaged as the new 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, 1995 and 1996. Coopers & Lybrand, L.L.P. has
audited the financial statements of Telegen Communications Corporation for the
past six fiscal years of operation.
During 1995 and 1996 Cordovano & Company, P.C.'s report on the
financial statements of Telegen for either of the past two years did not contain
an adverse opinion, disclaimer of opinion, or was qualified as to uncertainty,
audit scope, or accounting principles. During Telegen's three most recent
fiscal years and any subsequent interim period preceding such dismissal there
were no disagreements between Telegen and Cordovano & Company, P.C. regarding
any matter of accounting principles or practice, financial statement disclosure,
or auditing scope or procedure.
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.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF TELEGEN
(a) Name of Director Age Term of Office
---------------- --- --------------
Jessica L. Stevens(1) 45 October 28, 1996-Present
Bonnie A. Crystal(2) 43 October 28, 1996-Present
Warren M. Dillard(3) 54 October 28, 1996-Present
Frederick T. Lezak, Jr.(4) 55 October 28, 1996-Present
James R. Iverson(4) 68 October 28, 1996-Present
Larry J. Wells(4) 54 October 28, 1996-Present
- ------------------------------------------------------------------------------
(1) Ms. Stevens is also the President and Chief Executive Officer of Telegen.
(2) Ms. Crystal is also the Executive Vice-President and Secretary of Telegen.
(3) Mr. Dillard is also the Chief Financial Officer and Chief Operating
Officer of Telegen. Mr. Dillard failed to timely file one accurate Form 3,
reflecting the beneficial ownership of his stock because he failed to
include the 3,690 shares of Telegen common stock owned by his son who
lives in Mr. Dillard's household. This was subsequently reported on Form 5
filed on February 14, 1997.
(4) Mr. Lezak, Mr. Iverson, and Mr. Wells all serve on Telegen's Audit and
Compensation Committees.
-17-
Length of service
(b) Name of Officer Office in such Office
--------------- ------ ------------------
Jessica L. Stevens President and October 28, 1996-Present
Chief Executive Officer
Bonnie A. Crystal Executive Vice-President October 28, 1996-Present
and Secretary
Warren M. Dillard Chief Financial Officer October 28, 1996-Present
and Chief Operating Officer
W. Edward Naugler,Jr. Executive Vice-President of May 1996-Present
Telegen Display Laboratories,
Inc. and acting President
of Telegen Display
Laboratories, Inc. January 1997-Present
Profiles of Directors and Executive officers
- --------------------------------------------
Jessica L. Stevens has been an inventor and an engineer since 1972. From
1982 to 1988, Ms. Stevens was Chief Executive Officer, President, Chief
Technology Officer, and a Director of Woodside Design Associates, Inc., Redwood
City, California, a high technology think tank. From 1988 to 1989, Ms. Stevens
was Chairperson of the Board of Directors and Vice President of
Engineering/Manufacturing at Absolute Entertainment, Inc. and Imagineering,
Inc., both of New Jersey. Ms. Stevens has worked as a consultant to numerous
high technology companies, including Apple Computer, Inc., Activision, Inc.,
Coleco Industries, McDonnell Douglas, Parker Brokers, and has developed software
for the electronic game industry. Ms. Stevens is the sister of Mr. Daniel J.
Kitchen, President of MSM.
Bonnie A. Crystal has been a telecommunications engineer, consultant and
inventor since 1972. Before joining Telegen, she was Senior Staff Engineer for
Research and Development for Toshiba America MRI, Inc. From 1984 to 1989, she
was Senior, Engineer at Astec, USA, Ltd. in Personal Communications Systems,
Cellular and Satellite Earth Stations. She is the inventor of the Video Noise
Reduction (VNR) standard for satellite receivers. She was a founder of
International MedCom, Inc. and SE International, Inc.
Warren M. Dillard has been a financial analyst and financial manager since
1967. He managed investment portfolios of securities and real estate for Capital
Group and Shareholders Capital, respectively, both of Los Angeles, California,
from 1967 until 1975. In 1975, he became Senior Vice President and CFO of
Pepperdine University, continuing in that position until 1982. Since 1982, Mr.
Dillard has been an independent investment banker, financing early stage
business ventures. In October 1993, he became CFO of Telegen, adding the title
of Chief Operating Officer in April 1994.
Frederick T. Lezak, Jr. has been a financial executive since 1969,, with
senior positions at Time, Inc., McKesson Corp., The Headquarters Companies and
Visucom Productions, Inc. From 1973 to 1981, he was a controller for several
McKesson divisions, most recently Foremost Dairies in San Francisco. From 1981
to 1983, he was Treasurer and Chief Financial Officer of The Headquarters
Companies in San Francisco. Since 1983, Mr. Lezak has been a principal and owner
of Munson, Lezak, Jaspar & Dunn, a consulting firm which specializes in start-up
situations and corporate turnarounds. He has also been a founder and officer of
several start-up companies, including E.M.I., Inc.
James R. (Dick) Iverson has an extensive background in technology
development. Through 1982, he spent 19 years with Teledyne Ryan Electronics, the
last 6 years as General Manager. From 1972-1976, he was General Manager of the
Electronics Division of General Dynamics, managing projects ranging from
satellite systems to aircraft test equipment. He was the developer of the first
Global Positioning Satellite System (GPS). From 1976 through 1986, Mr. Iverson
was Group Vice President for Gould, Inc., responsible for government and
commercial
-18-
electronics systems. In 1986, Mr. Iverson was elected President of the American
Electronics Association (AEA), a 3,000 member national trade association,
representing companies in semiconductors, computers, telecommunications and
software. He recently retired from that position and is now an independent
consultant to the electronics industry.
Larry J. Wells is the founder and a director of Sundance Venture Partners,
L.P., a venture capital fund, and is the Chairman of Anderson & Wells Company,
which manages Sundance Venture Partners, L.P. and El Dorado Investment Company.
Mr. Wells also has served as a director and President of Sundance Capital
Corporation since May 1989. From 1983 to 1987, Mr. Wells served as Vice
President of Citicorp Venture Capital and then became Senior Vice President of
Inco Venture Capital. From May 1969 to June 1983, Mr. Wells was the founder and
President of Creative Strategies International, a market research consulting
firm specializing in emerging markets. Mr. Wells currently serves on the board
of directors of Cellegy Pharmaceutical, Inc. and Indentix, Inc., which are
publicly held companies. Mr. Wells also is a director of Upside Publishing,
Inc., Plop Golf Company, VoiceCom Systems, Inc. and Murphex Corporation.
W. Edward Naugler, Jr. has been a project manager for cellular phone
development at Universal Cellular from 1991 to 1993, and has been CEO of
Hsight Digital Glass, a flat panel start-up from 1993 through 1995. Mr. Naugler
joined the Company in January 1995 in the capacity of executive vice president
of Telegen Display Laboratories, Inc. Since May 1996, Mr. Naugler has been a
Director and Executive Vice President of Telegen Display Laboratories, Inc. In
January, 1997 Mr. Naugler became acting President of Telegen Display
Laboratories, Inc.
ITEM 11. EXECUTIVE COMPENSATION
The following information is presented with respect to the current
directors and executive officers of Telegen.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation Awards
------------------- ------------------------------
(a) (b) (c) (d) (e) (f) (g)
Restricted
Name and Principal Other Annual Stock Options/
Position Year Salary ($) Bonus ($) Compensation ($) Award(s) ($) SAR's (#)
- --------------------- ---- --------- --------- ---------------- ------------- -------------
Jessica L. Stevens, 1996 $170,836 $ -- $ -- $ -- 133,501
President, Chief Executive 1995 29,167 -- -- -- 20,004
Officer and Director 1994 20,833 -- -- -- 63,336
Bonnie A. Crystal, 1996 157,500 -- -- -- 107,650
Executive Vice President, 1995 60,000 -- -- -- 18,000
Secretary and Director 1994 71,260 -- -- -- 57,000
Warren M. Dillard, 1996 136,667 -- -- -- 106,799
Chief Operating Officer, 1995 53,333 -- -- -- 15,996
Chief Financial Officer 1994 63,333 -- -- -- 49,064
and Director
Dan Kitchen 1996 100,000 -- -- -- --
President of Morning Star 1995 -- -- -- -- --
Multimedia, Inc. 1994 -- -- -- -- --
William J.P. Weiland, 1996 72,993 -- -- -- 24,575
Counsel and 1995 -- -- -- -- --
Assistant Secretary 1994 -- -- -- -- --
-19-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of Telegen's common stock as of December 31, 1996. The table sets
forth (i) each shareholder known by Telegen to be the beneficial owner of more
than 5% of any class of Telegen's securities, (ii) each director of Telegen,
(iii) each executive officer of Telegen and (iv) all directors and executive
officers as a group.
AMOUNT
NAME POSITION BENEFITS OWNED (1)
- ------------------------------- ----------------- ------------------
Jessica L. Stevens (2) President, Chief 1,377,635
Executive Officer
and Director
Bonnie A. Crystal (2) Executive Vice 369,100
President,
Secretary and
Director
Warren M. Dillard (2)(4) Chief Operating 189,391
Officer, Chief
Financial Officer
and Director
Frederick T. Lezak, Jr. (2) Director 67,800
James R. Iverson (2) Director 20,520
Larry J. Wells (2) (3) Director 220,600
W. Edward Naugler Executive Vice- (5)
President of TDL
Acting President
of TDL
All directors and executive ---------
officers as a group (7 persons) 2,245,036
- -----------------
(1) Beneficial ownership includes voting and investment power with respect to
the shares. Shares of common stock subject to options currently exercisable
or exercisable within 60 days of December 31, 1996 are deemed outstanding
for computing the percentage of the person holding such options, but are not
deemed outstanding for computing the percentage of any other person. Thus,
the sum of individuals' and entities' ownership as a percent of common stock
beneficially owned may exceed 100%.
(2) As of December 31, 1996, Telegen had 4,980,554 shares of common stock
outstanding. The number of common shares outstanding excludes 208,592
shares of common stock cancelled for lack of consideration. See "Item 3."
As of December 31, 1996, Ms. Stevens, Ms. Crystal and Messrs. Dillard,
Lezak, Iverson, and Wells had the right to acquire within 60 days,
from outstanding options, 216,341 shares, 182,200 shares, 171,489 shares,
15,600 shares, 15,000 shares, and 20,400 shares of Telegen common stock,
respectively.
(3) Mr. Wells is a founder and director of Sundance Venture Partners, L.P.,
which is a venture capital fund and the owner of 200,000 common shares of
Telegen.
(4) Beneficial Ownership includes 3,690 shares owned indirectly via an adult son
living at home. Mr. Dillard disclaims ownership of such shares.
(5) Mr. Naugler holds warrants to purchase 500,000 shares of Common Stock of
TDL.
-20-
ITEM 13. RELATED TRANSACTIONS
As stipulated in his January 26, 1995 employment agreement, in which
he was granted an option to purchase a 5% equity interest in a future TCC
(formerly Telegen) corporate venture, on May 2, 1996, W. Edward Naugler Jr.
was issued warrants with Telegen Display Laboratories, Inc. ("TDL"), one of
the Registrant's subsidiary's, whereby he received the right to purchase
500,000 shares of common stock of TDL for $0.01 per share, subject to an
expiration date of May 1, 2001.
ITEM 14. EXHIBITS
List of Exhibits
- ----------------
2.1* Agreement and Plan of Reorganization dated November 16, 1995, by and
among Solar Energy Research Corp, Telegen Corporation, and Telegen
Acquisition Corporation as amended by the First Amendment thereto,
dated January 18, 1996, the Second Amendment thereto, dated April 9,
1996, the Third Amendment thereto, dated July 10, 1996, the Fourth
Amendment thereto, dated August 13, 1996, and the Fifth Amendment
thereto, dated September 30, 1996.
2.2** Agreement and Plan of Reorganization and Merger Among Telegen
Corporation, Morning Star Multimedia, Inc., Daniel J. Kitchen, Kevin
C. Mitchell and Dennis P. Huzey dated 12/31/96.
3.1*** Articles of Incorporation of Solar Energy Research Corp. of California
dated August 30, 1996.
3.2*** Certificate of Amendment to the Articles of Incorporation of Solar
Energy Research Corp. of California dated October 28, 1996.
3.3*** Bylaws of Telegen Corporation.
4.1**** Subscription Agreement for Series A Preferred Stock.
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 as of May 30, 1996.
10.3* Manufacturing License Agreement among Telegen Communications
Corporation, Telegen Display Laboratories, Inc., Transtech Electronics
Pte., Ltd. and IPC Corporation, Ltd., date May 30, 1996.
10.4* Lease Agreement between Metropolitan Life Insurance Company and
Telegen Communications 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 (formerly Telegen Coproration)
and Telegen Display Laboratories, Inc. effective as of May 2, 1996.
11.1 Statements re computation of per share earnings.
-21-
12.1 Statements re computation of ratios.
13.1*** Quarterly Report of Telegen Corporation on Form 10-QSB as originally
filed with the Commission on November 12, 1996.
16.1*** Letter re change in Telegen Corporation's certifying accountant.
21.1 Subsidiaries of Registrant:
22.1* Information Statement sent to the Shareholders of Solar Energy
Research Corp., a Colorado corporation, for the Shareholder Meeting on
September 27, 1996 to approve Merger with Telegen Corporation.
27.1 Financial Data schedule.
* Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-4 (No. 333-4037) as filed with the
Commission on May 17, 1996.
** Incorporated by reference to exhibit filed with the Registrant's Report on
Form 8-K as filed with the Commission on January 15, 1997.
*** Incorporated by reference to exhibit filed with the Registrant's Quarterly
Report on Form 10-QSB as filed with the Commission on November 12, 1996.
****Incorporation by reference to exhibit filed with the Registrant's Report on
From 8-K as filed with the commission on March 25, 1997.
-22-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TELEGEN CORPORATION
By: /s/ Warren M. Dillard
__________________________
Warren M. Dillard
Chief Financial Officer and
Chief Operating Officer
POWER OF ATTORNEY
Know all persons by these presents, that each person whose signature
appears below constitutes and appoints Warren M. Dillard, 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/ JESSICA L. STEVENS President and Chief Executive March 31, 1997
- --------------------------- Officer
Jessica L. Stevens
/S/ BONNIE A. CRYSTAL Executive Vice President Finance March 31, 1997
- --------------------------- and Secretary
Bonnie A. Crystal
/S/ WARREN M. DILLARD Chief Financial Officer, Chief March 31, 1997
- --------------------------- Operating Officer and Director
Warren M. Dillard
/S/ FREDERICK T. LEZAK, JR. Director March 31, 1997
- ---------------------------
Frederick T. Lezak, Jr.
/S/ JAMES R. IVERSON Director March 31, 1997
- ---------------------------
James R. Iverson
/S/ LARRY J. WELLS Director March 31, 1997
- ---------------------------
Larry J. Wells
TELEGEN CORPORATION AND SUBSIDIARIES
--------------
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants..................................... 1
Consolidated Balance Sheets as of December 31, 1996 and 1995.......... 2
Consolidated Statements of Operations for the years ended December
31, 1996, 1995 and 1994............................................. 3
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended December 31, 1996, 1995 and 1994........................ 4
Consolidated Statements of Cash Flows for the years ended December
31, 1996, 1995 and 1994............................................. 5
Notes to Consolidated Financial Statements............................ 6
F-2
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, 1996 and 1995, and related consolidated
statements of operations, shareholders' equity (deficit), and cash flows for
each of the three years ended December 31, 1996. 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 from
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, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years ended December 31, 1996, in
conformity with generally accepted accounting principles.
/S/ Coopers & Lybrand L.L.P.
Sacramento, California
March 21, 1997
F-3
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
--------------------------
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 3,166,657 $ 178,340
Accounts receivable, trade 17,784 3,704
Accounts receivable, other 248,703 2,186
Inventory 173,841 377,627
Prepaid expenses and other current assets 387,609 1,188
----------- ----------
Total current assets 3,994,594 563,045
Property and equipment, net 1,664,374 153,894
Deferred financing costs, net -- 197,248
Other assets 68,354 21,601
----------- ----------
$ 5,727,322 $ 935,788
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable $ 96,117 $ 279,343
Current maturities of notes payable -
shareholder 174,799 375,473
Accounts payable 357,366 1,184,131
Accrued payroll and related taxes 554,570 449,198
Accrued expenses 104,694 69,534
Deferred rent 4,987 --
----------- ----------
Total current liabilities 1,292,533 2,357,679
----------- ----------
Long-term liabilities:
Notes payable, net of current maturities -- 167,649
Capital lease 18,549 --
----------- ----------
Total long-term liabilities 18,549 167,649
----------- ----------
Total liabilities 1,311,082 2,525,328
----------- ----------
Commitments and contingencies (Notes 13 and 14)
Minority interests 325,077 --
----------- ----------
Shareholders' equity (deficit):
Series A Convertible preferred stock, $10
liquidation preference, authorized 550,000
shares, 0 and 112,750 shares issued and
outstanding at 1996 and 1995, respectively -- 922,526
Common stock, no par value; authorized 10
million shares, 5,021,460 and 3,048,170
shares issued and outstanding at 1996 and
1995, respectively 10,399,318 2,814,703
Additional paid-in capital 4,133,640 --
Accumulated deficit (10,441,795) (5,326,769)
----------- ----------
Total shareholders' equity (deficit) 4,091,163 (1,589,540)
----------- ----------
$ 5,727,322 $ 935,788
=========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1996, 1995 and 1994
--------------------------
1996 1995 1994
Revenues:
Sales of products $ 23,700 $ 145,795 $ 432,972
Contract services 517,356 -- --
---------- ---------- ----------
541,056 145,795 432,972
---------- ---------- ----------
Cost of goods sold (18,083) (170,421) (314,239)
Cost of contract services (68,612) -- --
---------- ---------- ----------
(86,695) (170,421) (314,239)
---------- ---------- ----------
Gross profit (loss) 454,361 (24,626) 118,733
Operating expenses:
Selling and marketing 439,350 89,275 92,170
Research and development 2,386,331 842,026 830,913
General and administrative 3,043,530 1,506,531 1,118,312
---------- ---------- ----------
Loss from operations (5,414,850) (2,462,458) (1,922,662)
Other income/(expense):
Interest income 194,443 725 9,608
Interest expense (146,650) (81,105) (30,658)
---------- ---------- ----------
Loss before minority interests (5,367,057) (2,542,838) (1,943,712)
Minority interests in subsidiary
net loss 252,031 -- --
---------- ---------- ----------
Net loss $(5,115,026) $(2,542,838) $(1,943,712)
========== ========== ===========
Net loss per common share $ (1.16) $ (0.88) $ (0.70)
========== ========== ===========
Weighted average
common shares 4,418,099 2,882,961 2,785,957
========== ========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT)
for the years ended December 31, 1996, 1995 and 1994
--------------------------
Preferred Stock Common Stock Additional
------------------- ------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
Balance, December 31, 1993, as restated
(note 2) -- $ -- 2,729,567 $1,708,166 -- $ (840,219) $ 867,947
Preferred stock issued 47,500 350,704 -- -- -- -- 350,704
Common stock issued -- -- 88,985 403,576 -- -- 403,576
Net Loss -- -- -- -- -- (1,943,712) (1,943,712)
-------- -------- --------- ---------- --------- ------------ ----------
Balance, December 31, 1994, as restated 47,500 350,704 2,818,552 2,111,742 -- (2,783,931) (321,485)
Preferred stock issued, net of offering
cost of $80,678 65,250 571,822 -- -- -- -- 571,822
Common stock issued, net of
offering cost of $70,933 -- -- 96,285 445,966 -- -- 445,966
Issuance of common stock warrants -- -- -- 251,995 -- -- 251,995
Pooling of interests
with Morning Star Multimedia -- -- 133,333 5,000 -- -- 5,000
Net loss -- -- -- -- -- (2,542,838) (2,542,838)
-------- -------- --------- ---------- --------- ------------ ----------
Balance, December 31, 1995, as restated 112,750 922,526 3,048,170 2,814,703 -- (5,326,769) (1,589,540)
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 -- -- 6,461,929
Issuance of common stock warrants -- -- -- 200,160 -- -- 200,160
Additional paid-in capital (notes 1 and 8) -- -- -- -- $4,133,640 -- 4,133,640
Net loss -- -- -- -- -- (5,115,026) (5,115,026)
-------- -------- --------- ---------- --------- ------------ ----------
Balance, December 31, 1996 -- -- 5,021,460 $10,399,318 $4,133,640 $(10,441,795) $4,091,163
======== ======== ========= ========== ========= ============ ==========
The accompanying notes are an integral part of these financial statements.
F-6
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996, 1995 and 1994
--------------------------
1996 1995 1994
Cash flows from operating activities:
Net loss $(5,115,026) $(2,542,838) $(1,943,712)
----------- ----------- ------------
Adjustments to reconcile net loss to net cash used in operating
activities:
Minority interests in subsidary net loss (252,031) __ __
Depreciation 179,340 58,784 53,509
Amortization 8,104 13,269 13,251
Amortization of deferred financing costs 197,248 22,529 --
Accretion of bridge loan discount 156,627 17,833 --
Allowance for doubtful accounts -- 14,113 --
Provision for inventory write-downs 217,985 19,381 --
Operating expenses paid with issuance of common stock and common
stock equivalents 325,045 536,964 209,219
Interest expense added to note payable principal -- 20,853 28,162
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (255,597) 8,382 167,089
(Increase) decrease in prepaid expenses (386,421) 28,044 (28,044)
(Increase) in inventory (14,199) (251,718) (130,885)
(Increase) in other assets (54,857) -- 5,497
(Decrease) increase in trade and other accounts payable (651,966) 697,783 204,314
Increase in accrued expenses 145,519 323,275 147,999
---------- ---------- ----------
Total adjustments (385,203) 1,509,492 670,111
---------- ---------- ----------
Net cash used in operating activities (5,500,229) (1,033,346) (1,273,601)
---------- ---------- ----------
Cash flows used in investing activities:
Insurance proceeds on fixed assets -- 12,500 --
Purchase of fixed assets (1,671,271) -- (117,125)
Purchase of intangible assets -- -- (1,120)
---------- ---------- ----------
Net cash (used in) provided by investing activities (1,671,271) 12,500 (118,245)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from borrowings 275,000 457,640 19,311
Principal payments on notes payable (990,875) (26,203) --
Issuance of common stock, net of offering costs 6,270,694 163,165 142,320
Issuance of preferred stock, net of offering costs __ 571,822 350,704
Bridge loan offering costs -- (84,963) --
Issuance of stock by subsidiary, net of offering costs 4,604,998 -- --
---------- ---------- ----------
Net cash provided by financing activities 10,159,817 1,081,461 512,335
---------- ---------- ----------
Net increase in cash and cash equivalents 2,988,317 60,615 (879,511)
Cash and cash equivalents at beginning of year 178,340 117,725 997,236
---------- ---------- ----------
Cash and cash equivalents at end of year $ 3,166,657 $ 178,340 $ 117,725
========== ========== ===========
Supplemental disclosures:
Cash paid for interest $ 146,240 $ 98 $ --
========== ========== ===========
Cash paid for income taxes $ 1,750 $ 800 $ 800
========== ========== ===========
The accompanying notes are an integral part of these financial statements.
F-7
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business
------------------
Telegen Corporation (the Company) designs, develops and manufactures
intelligent telecommunication, internet hardware, multimedia and flat panel
display products. Currently, the Company is only marketing its
telecommunications and multimedia products. 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. Additionally, on December 31, 1996, the Company
acquired Morning Star MultiMedia, Inc. (Morning Star) 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.
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 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.
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, 1996, the Company's cash deposits included cash in banks of
$3,007,730, of which $200,000 is federally insured and money market funds of
$158,927.
F-8
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
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.
Deferred Financing Costs
------------------------
Deferred financing costs, which were incurred by the Company in connection
with the Bridge Financing (Note 6), are charged to operations as additional
interest expense over the life of the underlying debt using the interest
method.
Other Assets
------------
Other assets consist of deposits, trademarks, patents and organization
costs. The trademarks, patents and organization costs are carried at cost
and are amortized on a straight-line basis over five years.
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 as products are shipped or services
are rendered.
Research and Development Costs
------------------------------
Expenditures relating to the development of new products and processes,
including significant improvements to existing products, are expensed as
incurred.
F-9
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
Income Taxes
------------
The Company reports income taxes in accordance with Statement of Financial
Accounting Standards 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
-------------------------
Computation of net loss per common share is computed using the
weighted average number of common and dilutive common equivalent
shares outstanding during the period.
Concentration of Credit Risk
----------------------------
Most of the Company's revenues are derived from sales to a few major
telecommunications 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.
New Accounting Pronouncements
-----------------------------
SFAS No. 123, Accounting for Stock-Based Compensation
-----------------------------------------------------
Statement of Financial Account Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123) establishes fair value based accounting and
reporting standards for stock-based employee compensation plans. The
statement defines a fair value method of accounting for an employee stock
option or similar equity instrument and allows parties to elect to continue
to measure compensation costs using the intrinsic value based method
prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees.
The Company has elected to continue using the intrinsic value method to
account for its stock-based compensation plans. SFAS 123 requires companies
electing to continue using the intrinsic value method to make certain pro
forma disclosures (see Note 8).
F-10
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
SFAS 128, Earnings Per Share
----------------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. SFAS
No. 128 eliminates the presentation of primary earnings per share (EPS) and
replaces it with basic EPS (with the principal difference being that common
stock equivalents are no longer included in computing basic EPS), eliminates
the modified treasury stock method for stock options and warrants,
eliminates the three percent materiality provision for determining when
primary or fully diluted EPS should be presented, and revises the treatment
for contingent stock awards. SFAS No. 128 also requires dual presentation
of basic and fully diluted EPS on the face of the income statement for all
entities with complex capital structures regardless of whether basic and
diluted EPS are the same, requires the use of income from continuing
operations as the control number for determining if a computation for
diluted EPS would be anti-dilutive, requires potential common shares to be
added to the diluted EPS computation in sequence from most dilutive to least
dilutive, and requires a reconciliation of the numerator and denominator
used in computing basic and fully diluted EPS.
The Company has not determined the effect of adopting SFAS No. 128.
SFAS 129, Disclosure of Information about Capital Structure
-----------------------------------------------------------
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 129, Disclosure
of Information about Capital Structure. SFAS No. 129 establishes
standard for disclosing information about an entity's capital structure.
The Company has not determined the disclosure effect of
adopting SFAS No. 129.
Accounting 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.
Reclassifications
-----------------
The Company has made certain reclassifications to prior year amounts in
order to conform with the current presentation. The reclassifications have
no impact on net income or common shareholders' equity.
F-11
2. 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 have been restated to
include the accounts and operations of Morning Star for all periods prior to
the merger.
Morning Star was established in October 1995 and used a fiscal year ending
December 31. Accordingly, the restated financial statements of the Company
combine the December 31, 1996 and 1995 financial statements of Morning Star.
Separate results of the combined entities for the years ended December 31,
are as follows:
1996 1995 1994
Net sales:
Telegen $ 23,700 $ 145,795 $ 432,972
Morning Star 517,356 -- --
----------- ----------- -----------
$ 541,056 $ 145,795 $ 432,972
=========== =========== ===========
Net loss:
Telegen $(4,860,258) $(2,517,926) $(1,943,712)
Morning Star (254,768) (24,912) --
----------- ----------- -----------
$(5,115,026) $(2,542,838) $(1,943,712)
============ ============ ===========
SERC
----
In October 28, 1996, Solar Energy Research Corp. (SERC), a SEC
registrant, acquired all of the outstanding common stock of
the Company. For accounting purposes, the acquistition has been
treated as a recapitalization of the Company with the Company as
the acquiror (reverse acquisition). The historical financial
statements prior to October 28, 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.
3. INVENTORY:
Inventories consist of the following at December 31:
1996 1995
Raw materials and supplies $ 88,555 $360,046
Finished goods - Teleblocker -- 11,043
Finished goods - ACS 85,286 6,538
-------- --------
$173,841 $377,627
======== ========
F-12
4. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and consist of the following at
December 31:
1996 1995
Machinery and equipment $1,343,906 $ 283,457
Leasehold improvements 573,893 3,453
Office furniture and fixtures 75,542 16,610
---------- ---------
1,993,341 303,520
Less accumulated depreciation
and amortization (328,967) (149,626)
---------- ---------
$1,664,374 $ 153,894
========== =========
5. OTHER ASSETS:
Other assets are stated at cost and consist of the following:
1996 1995
Organizational costs $ 11,819 $ 11,819
Trademarks 47,755 47,755
Patents 13,225 13,225
-------- --------
72,799 72,799
Less accumulated amortization (72,799) (64,694)
-------- --------
-- 8,105
Deposits 68,354 13,496
-------- --------
$ 68,354 $ 21,601
======== ========
F-13
6. NOTES PAYABLE:
Notes payable consist of the following at December 31:
1996 1995
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 --
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 75,000 100,000
Note payable to shareholder, interest at 8%,
principal and accrued interest due July 1, 1997,
without collateral -- 167,649
Note payable to a bank (line of credit), including
accrued interest with interest at 13%,
without collateral -- 172,370
Note payable (Bridge Loans) to shareholders,
interest at 15%, principal due October 1996
through December 1996, interest due quarterly
beginning March 1996, collateralized by
equipment, receivables, and inventory (Note) -- 350,473
Note payable to shareholder, interest at 10%,
principal and accrued interest due February
1995, without collateral -- 25,000
Note payable to others, including, accrued
interest 21,117 6,973
-------- --------
270,916 822,465
Less current maturities 270,916 (654,816)
-------- --------
$ -- $ 167,649
======== =========
F-14
6. NOTES PAYABLE, continued:
The principal balance of the convertible subordinated note payable is
convertible, at the holder's discretion, into common stock of the Company at
a rate of $7 per share.
The note payable to a bank was the subject of litigation between the lender
and the Company. The lender sued the Company for non-payment. The Company
alleged that the lender did not perform under the terms of the original
note. Common stock totaling 208,592 shares originally issued to
intermediaries in the transaction were canceled in 1993 due to failure to
perform and conflict of interest. Such shares are not recorded as issued or
outstanding. The full balance of the note and interest accrued thereon at
13% per annum are reflected as current liabilities as of December 31, 1995.
During 1996, the Company and bank reached a settlement whereby the Company
paid $100,000 which the Bank accepted as payment in full. The Company filed
a lawsuit against intermediaries in the transaction alleging that the
intermediaries obtained title to the Company's common stock through illegal
means and that the shares of stock were validly canceled. The matter is now
pending in U.S. District Court. Management believes the outcome of this
matter will not have a material adverse effect on the Company's financial
position, results of operations and cash flows.
7. BRIDGE FINANCING:
During 1995, the Company entered into a Bridge Loan and Consulting Agreement
with a Placement Agent (Agent) pursuant to which the Agent assisted the
Company in obtaining new capital in the form of one-year notes (see Note 6)
bearing interest at 15% per annum (Bridge Loan). The Company granted to the
purchasers of the notes, common stock of Telegen in an amount equal to one
percent of the then outstanding common stock. The Agent guaranteed the
payment of the principal and accrued interest of the notes. The Company has
issued common stock to the Agent in an amount determined by formula and paid
the Agent commissions totaling 15% of the gross amount raised.
In 1996, the Company received gross Bridge Loan proceeds of $715,000 from
the issuance of one-year notes and 34,892 shares of the Company's common
stock. Of the total proceeds, $174,460 was allocated to common stock and
$540,540 was allocated to debt. The Agent received $111,930 from the
proceeds and 66,868 shares of common stock. Other offering expenses were
approximately $33,100. Aggregate financing costs of $479,378 were allocated
to debt financing costs and common stock in the amounts of $362,410 and
$116,968, respectively.
The notes were paid in full on May 1, 1996. Accordingly, the deferred
financing costs were fully amortized during 1996.
F-15
8. SHAREHOLDERS' EQUITY:
Convertible Preferred Stock
---------------------------
At December 31, 1995, the Company had 1,000,000 shares of Preferred Stock
authorized of which 550,000 shares were designated Series A. Each share of
Series A Convertible Noncumulative Preferred Stock was entitled to one vote
per share of common stock into which the Preferred was convertible into
common stock at the holder's discretion. The Series A Preferred Stock was
to automatically convert into Common Stock in the event of 1) a public
offering of not less than $15 per share, or 2) the affirmative vote of 67%
of the outstanding Preferred Shares. In all cases, the conversion rate was
1:1, subject, in certain circumstances, to anti-dilutive adjustments. Each
share of Series A Preferred Stock was entitled to receive noncumulative
dividends at a rate of 8% per annum if declared by the directors of the
Company and in preference to the Common Stock. In the event of liquidation,
each share of Preferred was entitled to receive, in preference to the Common
shareholders, an amount equal to $10 per Preferred Share, which depending on
circumstances, could be paid in cash or securities of any entity surviving
the liquidation. During 1996, the Series A Preferred Stock was converted
into 185,500 shares of common stock.
Common Stock
------------
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 totaling $200,160 were recorded to reflect the difference
between the fair value of the Common Stock and the exercise price. In
addition, 206,882 Common shares were issued as additional commission and,
accordingly $1,034,410 was recorded as additional offering costs.
F-16
8. SHAREHOLDERS' EQUITY, continued:
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 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, 1995 and 1994, respectively, 4,163 shares, 1,582 shares and 7,392
shares were issued to employees and $20,815, $7,910 and $36,960 was
recorded as an expense. Options granted under this plan are included in the
table below.
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.
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.
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, options to
purchase additional shares would be granted in certain circumstances.
In Novermber 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 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 commmence 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.
Compensation expense related to the plan for 1996 was not significant.
F-17
8. SHAREHOLDERS' EQUITY, continued:
The following summarizes the stock option transactions for the three-year
period ended December 31, 1996:
OPTION
NUMBER PRICE PER
OF SHARES SHARE
Outstanding and exercisable at
December 31, 1993 13,680
Issued 1,873 $1.00
2,266 $4.00
338,768 $5.00
Exercised (26) $5.00
Forfeited --
---------
Outstanding and exercisable at
December 31, 1994 356,561
Issued 98,352 $5.00
Exercised (150) $5.00
Forfeited (6,501) $5.00
---------
Outstanding and exercisable at
December 31, 1995 448,262 $5.00
Issued 649,624 $5.00
Exercised (2,673) $1.00 - $5.00
Forfeited (10,410) $5.00
---------
Outstanding at December 31, 1996 1,084,803
=========
Exercisable at December 31, 1996 1,031,843
=========
Stock Option and Incentive Plan
-------------------------------
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the stock option plans. Compensation costs of $20,815,
$7,910 and $36,960 for the years ended December 31, 1996, 1995 and 1994,
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.
The pro forma amounts for the years ended December 31 are indicated below:
1996 1995
Net loss:
As reported $(5,115,026) $(2,542,838)
Pro Forma $(5,342,807) $(2,571,216)
Net loss per share:
As reported $(1.16) $(.88)
Pro Forma $(1.21) $(.89)
F-18
8. SHAREHOLDERS' EQUITY, continued:
The fair value of the options issued prior to the reverse merger
is estimated on the date of each grant using the Minimum Value
pricing model. For options issued subsequent to the reverse merger,
the fair value of the options is estimated on the date of grant using a
modified Black-Scholes option valuation formula. The following are weighted-
average assumptions used for stock option grants in 1996 and 1995:
POST MERGER PRE MERGER
1996 1996 1995
Dividend yields 0 O 0
Expected volatility 93.53% N/A* N/A*
Risk-free-interest rates 5.44% 5.63%
Expected time to exercize 1 year 1 year 1 year
* No assumption required for grant dates before the Company's stock
was publically traded
The weighted-average grant date fair value of options granted was $.27 and
$2.76 for the periods before and after the merger in 1996, respectively,
and $.27 for the year ended December 31, 1995.
Warrants
--------
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.
F-19
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, 1996, 1995 and 1994, under the provisions of SFAS No. 109 are
as follows:
1996 1995 1994
Federal net operating loss
carryforward $ 2,637,417 $ 1,658,234 $ 873,684
State operating loss carryforward 310,257 292,630 154,084
---------- ---------- ----------
2,947,674 1,950,864 1,027,768
Capitalized research and
experimentation 749,162 -- --
Other 96,261 -- --
----------- ----------- ----------
3,793,097 1,950,864 1,027,768
Less valuation allowance (3,793,097) (1,950,864) (1,027,768)
----------- ----------- -----------
$ -- $ -- $ --
========== ========== ==========
Net operating loss (NOL) carryforwards of $13,074,837 expire from 2005 to
2011 for federal income tax reporting purposes and from 1998 to 2001 for
state tax reporting purposes. Under current tax law a change in ownership
of a certain magnitude may limit NOL carryforwards. A change
of ownership occurred in April 1996 resulting in a limitation on the
utilization of NOL's of $1,110,780 per year.
F-20
9. INCOME TAXES, continued:
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.
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.
Notes Payable
The fair value of the Company's notes payable is estimated by discounting
the future cash flows using rates currently available for debt of similar
terms and maturity. 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, 1996,1995 and 1994, the Company received
the following services in exchange for shares of common stock:
1996 1995 1994
---------------------- ---------------------- -----------------------
Services Shares Services Shares Services Shares
Received Issued Received Issued Received Issued
--------- -------- ---------- -------- ---------- --------
Legal Services $ 138,690 27,737 $ 217,000 43,083 $ 166,000 38,421
Employee Services 20,815 4,163 7,900 1,582 37,000 7,392
Deferred Financing Costs -- -- 49,500 9,899 -- --
Other Services 106,449 25,430 66,000 13,788 19,000 3,418
Accounts Payable -- -- 3,300 400 52,000 14,010
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.
F-21
11. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES,
continued:
During 1996, the Company converted its 112,750 shares of preferred stock to
185,500 shares of common stock.
In December 1996, the Company acquired the common stock of Morning Star. The
acquisition was accounted for as a pooling-of-interests. The Company issued
133,333 shares of common stock in exchange for the assets acquired.
Capital lease obligations incurred during 1996 and 1995 for various machinery
and equipment were $18,549 and $16,611, respectively.
In 1995, approximately $252,000 in employee services was received in exchange
for 50,500 common stock warrants (Note 7). 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.
In 1994, the Company received a vehicle in exchange for $5,000 in cash and a
note payable to the seller for $10,000.
12. SUBSEQUENT EVENTS:
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 financing
is expected to take place in three tranches, each amounting to $5 million.
Remaining financings beyond the first tranche are dependent on the Company
achieving certain financial goals. According to the agreement, 8% Cumulative
Series A Preferred Stock will be issued at a 20% discount. In addition,
warrants will be issued to the holders to purchase common stock in an
aggregate amount of 20% of the value of the Series A Preferred at a fixed
price per share (fair value at the date of issuance). In addition to an 8%
commission, placement agents will receive warrants to purchase common stock
in an aggregate amount of 10% of the face value of the Series A Preferred at
a fixed price per share (fair value at the date of issuance). The Series A
Preferred Stock is convertible at any time at the holder's option and is
automatically converted on December 30, 1998. The conversion ratio is formula
based as defined in the agreement. The Company has a call option beginning
120 days following the first tranche to repurchase any outstanding portion of
the securties at face value plus accrued dividends as defined in the
agreement. The Company has also agreed not to sell any new equity series at
a discount except in certain circumstances as defined in the agreement.
13. 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
F-22
with its portion of the facilities. The Company's noncancelable lease
agreements expire during 2001.
13. COMMITMENTS, continued:
The Company's future minimum lease payments under noncancelable leases are
as follows:
1997 $ 609,111
1998 616,006
1999 621,111
2000 627,561
2001 341,535
-----------
$ 2,815,324
===========
Rental expense charged to operations for all operating leases was
approximately $273,000, $202,000 and $189,000 for the years ended December
31, 1996, 1995 and 1994, respectively.
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 exerised based on certain restrictions as defined. Upon
exercize, in addition to license fees, the Company will receive
royalties based on gross revenues from product sales.
Sales Commitments
-----------------
In March 1996, the Company consummated an Agreement to sell a minimum of
$360,000 in products and services to a telecommunications company by March
1997.
The Company's telecommunication products are manufactured in Hong Kong
and The People's Republic of China by a single manufacturer. The
Company contracts with the manufacturer on a purchase order basis and
does not have a long-term agreement with the manufacturer. The Company
is currently pursuing additional assembly sources which meet the
Company's quality specifications. Nonetheless, the Company believes
that it has adequate capacity through its current manufacturer to
meet its requirements through the next year.
14. CONTINGENCIES:
F-23
The Company is 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.
F-24
15. RELATED PARTY TRANSACTIONS:
Revenues to a business whose principal is a director of the Company include
approximately $0 and $30,000 in sales for the years ended December 31, 1996
and 1995, respectively.
F-25
The Shareholders
Telegen Corporation and Subsidiaries
Our report on the consolidated financial statements of Telegen Corporation and
Subsidiaries as of December 31, 1996 and 1995 and for each of the three years
ended December 31, 1996, is included on page F-3 of this Form 10-K. In
connection with our audits of such financial statements, we have also audited
the financial statement schedule listed in the index as Exhibit 27.1 of this
Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/S/ Coopers & Lybrand L.L.P.
Sacramento, California
March 21,1997
S-1