<PAGE>
Pursuant to Rule 424(b)(3)of the
Securities Act of 1933
Securities Act Registration
No. 333-4037
INFORMATION STATEMENT-PROSPECTUS
SOLAR ENERGY RESEARCH CORP.
10075 E. County Line Road
Longmont, Colorado 80501
--------------------------------------------
This Information Statement-Prospectus is being furnished to the
shareholders of Solar Energy Research Corp. ("SERC") in connection with a
Special Meeting of Shareholders to be held on September 27, 1996, and at any
adjournments thereof, to consider and vote upon the following matters: (i)
approval of an Agreement and Plan of Reorganization, as amended (the
"Agreement"), by and between SERC, Telegen Corporation, a California corporation
("Telegen"), Solar Energy Research Corp. of California, a California corporation
and wholly owned subsidiary of SERC ("SERC California"), and Telegen Acquisition
Corporation, a California corporation and wholly owned subsidiary of SERC
("TAC"), pursuant to which SERC California, after giving effect to the proposed
redomiciliation of SERC as a California corporation through a merger of SERC
with and into SERC California, will acquire all of Telegen's outstanding capital
stock through a merger of TAC with and into Telegen with Telegen thereby
becoming a wholly owned subsidiary of SERC California (the "Acquisition"); (ii)
approval of the redomiciliation of SERC as a California corporation through the
merger of SERC with and into SERC California; (iii) ratification of the one
share-for-seven and one-fourth shares (1 for 7.25) reverse split of the
currently issued and outstanding shares of SERC common stock approved by the
Board of Directors; (iv) election to the SERC California (after giving effect to
the proposed redomiciliation of SERC as a California corporation) board of
directors of the six current Telegen directors to fill the vacancies resulting
from the resignations of the current SERC directors pursuant to the terms of the
Agreement; and (v) approval of an amendment to the SERC Articles of
Incorporation to change the name of SERC California (after giving effect to the
proposed redomiciliation of SERC as a California corporation) to Telegen
Corporation. Upon consummation of the Acquisition, each share of outstanding
Telegen common stock and preferred stock will be converted into the right to
receive one share of SERC California common stock and Series A preferred stock,
respectively (after giving effect to the redomiciliation of SERC as a California
corporation and the one share-for-seven and one-fourth shares (1 for 7.25)
reverse split of the currently issued and outstanding shares of SERC common
stock). Further, SERC California will issue options to acquire shares of SERC
California common stock in exchange for the options to acquire Telegen common
stock outstanding immediately preceding the Acquisition. When the Acquisition
becomes effective, the principal shareholders of Telegen will become the
principal shareholders of SERC. Therefore, a change in control of SERC will
occur if the Acquisition is completed.
All information herein with respect to SERC and Telegen has been furnished
by SERC and Telegen, respectively.
--------------------------------------------
THIS INFORMATION STATEMENT-PROSPECTUS, WHICH IS BEING FURNISHED TO SERC
SHAREHOLDERS FOR PURPOSES OF VOTING UPON THE ACQUISITION AND THE OTHER
PROPOSALS LISTED ABOVE, ALSO CONSTITUTES THE PROSPECTUS OF SERC FOR THE
ISSUANCE OF SERC COMMON STOCK AND SERIES A PREFERRED STOCK.
--------------------------------------------
No person has been authorized to give any information or to make any
representation not contained in this Information Statement-Prospectus in
connection with the offering made hereby and, if given or made, such information
or representation must not be relied upon as having been authorized by SERC or
Telegen. This Information Statement-Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the
registered securities to which it relates or an offer to sell or a solicitation
of an offer to buy to any person in any jurisdiction where it is unlawful to
make such offer or solicitation. Neither the delivery of this Information
Statement-Prospectus nor any sale made hereunder shall under any circumstances
create any implication that there has been no change in the information
contained herein since the date hereof.
--------------------------------------------
NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION. THE COMMISSION HAS NOT
PASSED UPON THE FAIRNESS OR MERITS OF THIS TRANSACTION NOR UPON THE ACCURACY
OR ADEQUACY OF THIS INFORMATION STATEMENT-PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------------------------
The date of this Information Statement-Prospectus is August 23, 1996.
<PAGE>
AVAILABLE INFORMATION
SERC is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith files
reports and other information with the Securities and Exchange Commission (the
"Commission"). Such material can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549-1004. Copies of such material can also be obtained from the Public
Reference Section of the Commission, Washington, D.C. 20549, at prescribed
rates.
SERC has filed a Registration Statement on Form S-4 (the "Registration
Statement") under the Securities Act of 1933, as amended, with the Commission
with respect to the shares of SERC common stock and Series A preferred stock to
be issued in the Acquisition. As permitted by the rules and regulations of the
Commission, this Information Statement-Prospectus omits certain information
contained in the Registration Statement. For further information, reference is
made to the Registration Statement. Such additional information can be inspected
at the public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549-1004, and copies of such material can be obtained as
described above. Statements contained herein concerning any document filed as an
exhibit to the Registration Statement are not necessarily complete, and in each
instance reference is made to the copy of such documents filed as an exhibit to
the Registration Statement.
<PAGE>
SOLAR ENERGY RESEARCH CORP.
INFORMATION STATEMENT-PROSPECTUS
TABLE OF CONTENTS
SUMMARY
The Special Meeting of SERC Shareholders
The Acquisition
RISK FACTORS
SERC
TELEGEN
INTRODUCTION
THE ACQUISITION
The Parties
Background of the Acquisition
Summary of the Agreement
Vote Required
Availability of Appraisal Rights for Dissenting Shareholders
The SERC Board of Directors and Management Following the Acquisition
Resale of SERC Common and Series A Preferred Stock
Federal Income Tax Consequences of the Acquisition
Expenses of the Acquisition
Comparison of Rights of Holders of SERC Stock Under
Colorado and California Law
INFORMATION CONCERNING THE SERC SPECIAL MEETING
Matters to be Considered at Special Meeting
Meeting Procedures
Voting Rights and Votes Required
Stock Ownership of Directors, Executive Officers and their Affiliates
Executive Compensation
SERC
Business of SERC
SERC Plan of Operation
SERC Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Security Ownership of Certain Beneficial Owners and Management
Market for SERC Securities and Related Stockholder Matters
Description of SERC Securities
Legal Proceedings
TELEGEN
Business of Telegen
Telegen Management's Discussion and Analysis of Financial Condition
and Results of Operations
Telegen Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Security Ownership of Certain Beneficial Owners and Management
Management of Telegen
Certain Transactions with Management and Others
Market for Telegen Securities and Related Stockholder Matters
Legal Proceedings
LEGAL MATTERS
EXPERTS
INDEX TO FINANCIAL STATEMENTS
<PAGE>
SUMMARY
The following brief summary is intended to provide certain facts and
highlights from the information contained elsewhere in this Information
Statement-Prospectus. This summary is not intended to be complete, and is
qualified in its entirety by the more detailed information set forth elsewhere
in this Information Statement-Prospectus in its Exhibits. SERC shareholders and
Telegen shareholders are urged to read the entire Information
Statement-Prospectus carefully. This summary contains references to certain
sections of this Information Statement-Prospectus where more complete
information may be found. Unless otherwise defined herein, capitalized terms
used in this summary have the respective meanings assigned to them elsewhere in
this Information Statement-Prospectus.
The Special Meeting of SERC Shareholders
A Special Meeting of SERC shareholders will be held on September 27, 1996
at 2:00 p.m., local time, at 201 Steele Street, Suite 300, Denver, Colorado
80206.
At the special meeting of the shareholders of SERC, the shareholders will
be asked to consider and vote upon the following matters:
1. Approval of an Agreement and Plan of Reorganization, as amended (the
"Agreement"), by and among SERC, Telegen Corporation, a California
corporation ("Telegen"), Solar Energy Research Corp. of California, a
California corporation and wholly owned subsidiary of SERC ("SERC
California"), and Telegen Acquisition Corporation, a California corporation
and wholly owned subsidiary of SERC ("TAC"), pursuant to which SERC
California, after giving effect to the proposed redomiciliation of SERC as
a California corporation through a merger of SERC with and into SERC
California, will acquire all of Telegen's outstanding capital stock through
a merger of TAC with and into Telegen with Telegen thereby becoming a
wholly owned subsidiary of SERC California (the "Acquisition").
2. Approval of the redomiciliation of SERC as a California corporation through
a merger of SERC with and into SERC California.
3. Ratification of the one share-for-seven and one-fourth shares (1 for 7.25)
reverse split of the currently issued and outstanding shares of SERC common
stock approved by the Board of Directors.
4. Election to the SERC California (after giving effect to the proposed
redomiciliation of SERC as a California corporation) board of directors of
the six current Telegen directors to fill the vacancies resulting from the
resignations of the current SERC directors pursuant to the terms of the
Agreement.
5. Approval of an amendment to change the name of SERC California (after
giving effect to the proposed redomiciliation of SERC as a California
corporation) to Telegen Corporation.
Approval of the Agreement, redomiciliation of SERC as a California
corporation and the amendment to change the name of SERC to Telegen Corporation
will require the favorable vote of the majority of outstanding shares of SERC
common stock. The ratification of the one share-for-seven and one-fourth shares
(1 for 7.25) reverse split of SERC common stock and the election of the six
current Telegen directors to the SERC California Board of Directors will require
the affirmative vote of the majority of a quorum of SERC common stock
represented at the meeting. SERC's principal shareholder, who beneficially owns
53.7% of outstanding SERC common stock, will vote in favor of each of the
proposals listed above. Accordingly, each of the above proposals will be
approved by the required affirmative vote and, in the absence of the failure of
regulatory approval or an agreement to terminate the Agreement by the Board of
Directors of both SERC and Telegen, the Agreement will be consummated.
The record date for the stockholders meeting of SERC to determine the
shareholders entitled to vote at the meetings is July 31, 1996. On July 31,
1996, there were 1,427,596 shares of SERC common stock outstanding and
approximately 2,239 shareholders of record. SERC has no other class of shares
outstanding.
The Acquisition
The Parties
SERC. SERC, which was incorporated in Colorado on December 21, 1973, was
formerly engaged in the business of designing, marketing and servicing solar
heating systems. In December 1981, SERC reduced its solar business. SERC
discontinued its solar business in 1983 due to continued losses. The solar
industry segment serviced by SERC generally closed in 1985 with the termination
of Federal Solar Tax Credits. SERC has not provided service to any solar
customers since 1983 and is presently a development stage corporation. SERC's
primary activity during the period from 1985 through the end of 1992 was the
settling of various judgments relating to the discontinued solar business. Since
that time, SERC, which is a development stage corporation subject to the
informational reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), has been actively searching for an operating
business or businesses to acquire. SERC's corporate offices are located at 10075
East County Line Road, Longmont, Colorado 80501; (303) 772-3316. SERC owns all
of the capital stock of SERC California and TAC. SERC California and TAC were
organized by SERC for the purpose of effecting the acquisition by SERC of all of
the outstanding capital stock of Telegen through a merger of TAC with and into
Telegen with Telegen thereby becoming a wholly owned subsidiary of SERC
California (the "Acquisition").
Telegen. Telegen, which was incorporated in California on May 3, 1990, is a
privately owned, multi-faceted, high technology company with unique and
proprietary products, both developed and in development, in the
Telecommunications, Flat Panel Display and Internet Hardware markets. At
present, Telegen is organized into four divisions. The Telecom Products Division
("TPD") develops, manufactures and markets a line of intelligent
telecommunications products, providing advanced features to existing telephone
equipment and unique services for consumers and small businesses. Telegen
Display Laboratories, Inc. ("TDL"), a subsidiary of Telegen, has developed a
unique, low-cost flat panel display technology to compete with other types of
flat panel displays. The Internet Products Division ("IPD"), Telegen's newest
division, is developing low-cost, easy-to-use hardware platforms which will
allow consumers and small businesses to utilize specialized capabilities of the
Internet without the need for a computer. Finally, Telegen Laboratories is an
advanced R&D think tank, developing new products and technologies, which are
then manufactured and marketed through one of the operating divisions. Telegen's
corporate offices are located at 353 Vintage Park Drive, Foster City, California
94404; (415) 349-3220.
SERC California. SERC California, a wholly owned subsidiary of SERC, was
formed for the purpose of effecting the Acquisition as described above and has
engaged in no activities other than activities incidental to the Acquisition.
Telegen Acquisition Corporation. TAC, a wholly owned subsidiary of SERC,
was formed for the purpose of effecting the Acquisition as described above and
has engaged in no activities other than activities incidental to the
Acquisition.
The Terms
Pursuant to the Agreement, SERC California (after giving effect to the
proposed redomiciliation of SERC as a California corporation through a merger of
SERC with and into SERC California) will acquire all of Telegen's outstanding
capital stock through a merger of TAC with and into Telegen with Telegen thereby
becoming a wholly owned subsidiary of SERC California. The separate corporate
existence of TAC will cease and Telegen shall continue as the surviving
corporation. In connection with the Acquisition, which will become effective
upon the closing, all of the shares of Telegen common stock and Telegen
preferred stock will be canceled, and all holders thereof will automatically be
entitled to receive for each of their shares of Telegen common stock a share of
SERC California common stock (after giving effect to the proposed
redomiciliation of SERC as a California corporation and to the one
share-for-seven and one-fourth shares (1 for 7.25) reverse split of the issued
and outstanding shares of SERC common stock as outlined in the proposals for the
Special Meeting of SERC shareholders), and for each of their shares of Telegen
preferred stock a share of SERC California Series A preferred stock. Further,
each option to acquire Telegen common stock outstanding immediately prior to the
Acquisition will be converted into options to acquire the number of shares of
SERC California common stock equal to the number of shares of Telegen common
stock for which the option was exercisable immediately prior to the Acquisition.
The exercise price for any shares of SERC California common stock covered by
each such option will be equal to the exercise price for any shares of Telegen
common stock covered by the option exercisable immediately prior to the
Acquisition.
As of July 31, 1996, there were 4,433,455 shares of Telegen common stock
and 112,750 shares of Telegen Series A preferred stock (convertible at the
discretion of the holders into shares of common stock at the rate of two shares
of common stock for each share of Series A preferred stock) issued and
outstanding, as well as options to purchase 706,281 shares of Telegen common
stock at a weighted average exercise price of $4.99 per share, and warrants to
purchase 133,440 shares and 75,500 shares of Telegen common stock for $3.50 per
share and $.01 per share, respectively.
When the Acquisition becomes effective, the principal shareholders of
Telegen will become the principal shareholders of SERC. Therefore, a change in
control of SERC will occur if the Acquisition is completed. SERC's Board of
Directors has approved the Amended Agreement.
In addition to the acquisition of Telegen's operating business by SERC, the
Agreement provides for the
following items:
a) A $14.50 per share price protection provision for the benefit of current
shareholders of SERC;
b) Certain key employees of Telegen will enter into employment contracts,
effective upon the consummation of the Acquisition.
c) Resignations of all of the current officers and directors of SERC, with the
resulting vacancies to be filled by the appointment of the six current
directors of Telegen.
(See "The Acquisition - Additional Terms.")
Vote Required
To conserve resources, the Agreement was structured such that approval of
the Agreement by the shareholders of SERC and the shareholders of Telegen is not
required by law. Although approval of the Agreement by the shareholders of SERC
is not required by law, shareholder approval of the redomiciliation of SERC as a
California corporation and an amendment to change the name of SERC California to
Telegen Corporation is required. Therefore, since it was necessary for SERC to
hold a shareholders' meeting, the Board of Directors directed that the
Agreement, which underlies the amendments for which a shareholder vote is
required, also be voted on by the shareholders. Accordingly, the SERC Board of
Directors has directed that the Agreement be submitted to the shareholders of
SERC for their approval as outlined in the proposals for the Special Meeting of
SERC shareholders.
Under Colorado law, a shareholder may challenge a corporate action if he or
she can show that it is unlawful or fraudulent with respect to the complaining
shareholder or to the corporation. Such right is not affected by the fact that
the transaction was approved by a vote of shareholders as opposed to the same
transaction being approved by written consent of all the shareholders or without
shareholder approval. Since SERC's principal shareholder, who beneficially owns
53.7% of the outstanding SERC common stock entitled to vote on the Agreement,
will vote in favor of the Agreement, approval of the Agreement by a majority of
SERC shares is assured. Therefore, the shareholders of Telegen will become
shareholders of SERC (after giving effect to the redomiciliation of SERC as a
California corporation through a merger of SERC with and into SERC California)
at the exchange rate of one share of SERC California common stock and one share
of SERC California Series A preferred stock for each issued and outstanding
share of Telegen common stock and preferred stock, respectively. (See "The
Agreement" and Availability of Approval Rights for Dissenting Shareholders).
This Information Statement-Prospectus covers the registration of 5,948,303
shares of SERC common stock and 112,750 shares of SERC Series A preferred stock.
These amounts represent an adequate number of shares to exchange for all Telegen
shares outstanding, shares underlying options and warrants outstanding, shares
into which convertible securities may be converted and an estimated number of
common shares which may be issued under certain price protection provisions of
the Acquisition Agreement.
As a result of the Acquisition, the shareholders of Telegen will own
approximately 95.7% of the total issued and outstanding common shares of SERC
immediately after the Acquisition.
The Acquisition is subject to certain conditions. In addition, either SERC
or Telegen may withdraw from the Acquisition if the Acquisition is not
consummated before September 30, 1996.
SERC Board of Directors' Resolutions
The Board of Directors of SERC believes the Acquisition is in the best
interests of the shareholders of SERC due to a number of factors, including (i)
the enhanced business opportunities resulting from the acquisition of Telegen's
business; (ii) the assets, operations and prospects of Telegen; (iii) the
relative values of SERC capital stock and Telegen capital stock; and (iv) the
belief that the consideration proposed to be paid by SERC in the issuance of its
shares to acquire Telegen is fair to the shareholders of SERC from a financial
point of view. It has therefore approved resolutions in favor of the Acquisition
and each of the other proposals, which are related to the Acquisition, to be
considered and voted upon at the Special Meeting of SERC shareholders.
Description of SERC Securities
SERC's authorized capital currently consists of 100,000,000 shares of $.50
par value common stock and 25,000,000 shares of no par value preferred stock.
After giving effect to the redomiciliation of SERC as a California corporation,
the SERC common stock will have no par value. All shares of SERC's common and
preferred stock have equal voting rights, one vote per share, and are not
assessable. Voting rights are not cumulative; therefore, the holders of more
than 50% of the common and preferred stock of SERC could, if they chose to do
so, elect all the Directors.
Upon liquidation, dissolution or winding up of SERC, the assets of SERC,
after satisfaction of all liabilities and distributions to preferred
shareholders, if any, would be distributed pro rata to the holders of the common
stock. The holders of the common stock do not have preemptive rights to
subscribe for any securities of SERC and have no right to require SERC to redeem
or purchase their shares.
Holders of common stock are entitled to dividends, when and if declared by
the Board of Directors of SERC, out of funds legally available therefor. SERC
has not paid any cash dividends on its common stock, and it is unlikely that any
such dividends will be declared in the foreseeable future.
The Series A Convertible Noncumulative Preferred Stock ("Series A Preferred
Stock") designated by the SERC Board of Directors for exchange with Telegen
preferred shareholders in the Acquisition is entitled to one vote per share of
common stock into which the Series A Preferred Stock is convertible. The Series
A Preferred Stock is convertible into common stock (a) at the holder's
discretion, and (b) automatically in the event of (i) a public offering of
SERC's common stock at a price not less than $15 per share, or (ii) the
affirmative vote of 67% of the shares of the Series A Preferred Stock. In all
cases, the conversion rate will initially be one to two (1:2), subject, in
certain circumstances, to anti-dilutive adjustments. The holders of Series A
Preferred Stock have a noncumulative right to receive dividends at a rate of
$.80 per annum on each outstanding share of Series A Preferred Stock if declared
by the Board of Directors of SERC and in preference to the common stock. In the
event of liquidation, each share of Series A Preferred Stock is entitled to
receive, in preference to the common shareholders, an amount equal to $10,
which, depending on certain circumstances, may be paid in cash or securities of
any entity surviving the liquidation.
Availability of Appraisal Rights for Dissenting Shareholders
Pursuant to the general corporation laws of the states of Colorado and
California, the holders of SERC capital stock will have no dissenter or
appraisal rights as a result of SERC being the surviving corporation in a share
exchange.
Pursuant to the general corporation laws of the State of California, the
holders of Telegen capital stock will have no dissenter or appraisal rights
since Telegen, a California corporation, is being acquired by a California
corporation and Telegen shareholders are receiving in exchange for their shares
of Telegen shares in a California corporation. (See "The Acquisition -
Availability of Appraisal Rights for Dissenting Shareholders".)
Federal Income Tax Consequences of the Acquisition
While the parties have used their best efforts to structure the Acquisition
in such a manner as to minimize federal and state tax consequences to SERC and
Telegen through the Acquisition's treatment for tax purposes as a "tax-free"
reorganization under Section 368(a) of the Internal Revenue Code of 1986, as
amended, there can be no assurance that the Acquisition will result in such tax
treatment. Because of the complexities of the federal income tax laws, it is
recommended that each exchanging stockholder consult with his or her tax advisor
regarding the applicable federal, state and local income tax consequences of the
transactions contemplated by the Agreement. See "The Acquisition - Federal
Income Tax Consequences."
Certain Per Share Comparative Data
The following table sets forth certain per share information for the year
ended December 31, 1995 and for the six-month period ended June 30, 1996. For
each period presented, the following table sets forth (1) the historical net
loss per common share of SERC; (2) the historical net loss per common share of
Telegen; and (3) the unaudited pro forma combined net loss per common share
after giving effect to the proposed Acquisition. The information presented in
the table should be read in conjunction with the unaudited combined pro forma
financial statements and the separate historical consolidated financial
statements of SERC and Telegen and the notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
HISTORICAL PROFORMA PROFORMA
SERC TELEGEN ADJUSTMENTS COMBINED
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Year Ended December 31, 1995:
Loss per common and common
equivalent share: $(0.08) $(0.95) $0.13 $(0.90)
Weighted average shares outstanding 1,070,725 2,652,718 (923,039) 2,800,404
Six Months Ended June 30, 1996
(unaudited):
Loss per common and common
equivalent share $(0.07) $(0.37) $0.09 $(0.35)
Weighted average shares outstanding 1,334,265 3,941,693 (1,150,428) 4,125,730
</TABLE>
<PAGE>
RISK FACTORS
An investment in the securities of SERC will be speculative and involve a
high degree of risk. Accordingly, the following factors, in addition to those
discussed elsewhere in this Information Statement-Prospectus, should be
considered carefully in evaluating the Acquisition and the business of SERC
following the Acquisition. No investor should participate in the Acquisition or
otherwise acquire the securities of SERC unless such investor can afford a
complete loss of an investment in the securities of SERC.
SERC
History of Operating Losses; Accumulated Deficit; No Assurance of
Continuance as Going Concern
SERC is a development stage corporation. As of June 30, 1996, SERC had only
$13,837 in working capital. Further, SERC has had operating losses since its
inception. As noted in the independent auditors' report for the year ended
December 31, 1995, SERC's limited working capital and operating losses since
inception raise substantial doubt about SERC's ability to continue as a going
concern. Accordingly, there is no assurance that SERC can continue as a going
concern on a separate entity basis.
Absence of Public Market for SERC's Securities
There is presently no market for SERC's common stock and there can be no
assurance that any market will develop. The investment community could show
little or no interest in SERC in the future. As a result, persons receiving
SERC's securities may have difficulty in reselling such securities should they
desire to do so.
Telegen intends to apply for the listing of post-Acquisition SERC on the
NASDAQ Small Cap market system after the Registration Statement on Form S-4 of
which this Information Statement-Prospectus is a part becomes effective. As a
result of the Acquisition, it is expected that SERC will have (i) in excess of
$4 million in gross tangible assets, (ii) in excess of $2 million in tangible
net worth, (iii) at least 300 holders of SERC common stock, and (iv) at least
100,000 publicly held shares of SERC common stock and thus, assuming that two
registered and active market makers are obtained and the securities will have a
minimum bid price of $3 per share, will satisfy the requirements for listing on
the NASDAQ Small Cap market system. However, there can be no assurance that a
listing on the NASDAQ Small Cap market system will be obtained.
Material Adverse Effect on SERC's Securities of Securities and Exchange
Commission Penny Stock Regulations
Even if a market for SERC's common stock develops, certain Securities and
Exchange Commission regulations pertaining to penny stocks will have a material
adverse effect on the liquidity of SERC's common stock and Series A preferred
stock. The regulations define a penny stock to be any equity security that has a
market price (as defined) less than $5.00 per share subject to certain
exceptions. Such material adverse effects could include, among other things,
impaired liquidity with respect to SERC's securities and burdensome
transactional requirements associated with transactions in the securities,
including, but not limited to, waiting periods, account and activity reviews,
disclosure of additional personal financial information and substantial written
documentation. Although there are exceptions for an equity security that is
authorized or approved for authorization upon notice of issuance for quotation
on an automated quotation system sponsored by a registered securities
association, it is unlikely that SERC will independently qualify for this
exception prior to the acquisition of a company with sufficient assets to
qualify for quotation on the NASDAQ system.
Dividends
No dividends have been paid on SERC's common stock since inception, and
none are contemplated at any time in the foreseeable future.
Telegen
History of Operating Losses; Accumulated Deficit and Minimum Revenues
Telegen was incorporated in 1990 and first shipped products in 1991.
Telegen has been engaged in lengthy development of its products and has incurred
significant operating losses in every fiscal year since its inception. The
cumulative net loss for the period from inception through June 30, 1996 is
$6,748,808. Telegen may continue to incur operating losses through the remainder
of 1996. In order to become profitable, Telegen must increase sales of its
existing products, sustain volume manufacturing of its products at increased
levels, develop new products for new and existing markets, and manage its
operating expenses and expand its distribution capability. There can be no
assurance that Telegen will meet and realize these objectives or ever achieve
profitability.
Future Capital Needs
Telegen's future capital requirements will depend upon many factors,
including the extent and timing of acceptance of Telegen's products in the
market, the progress of Telegen's research and development, Telegen's operating
results and the status of competitive products. Although Telegen believes that
it currently has adequate capital to meet its forecasts for the following twelve
months, 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. There can
therefore be no assurance that Telegen will not require additional funding, or
that any additional financing will be available to Telegen on acceptable terms,
if at all. If adequate funds are not available as required, Telegen's results of
operations will be materially adversely affected. See "Telegen - Telegen
Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Exposure to Technological Change
The market for Telegen's products is characterized by rapid technological
change and evolving industry standards and is highly competitive with respect to
timely product innovation. The introduction of products embodying new technology
and the emergence of new industry standards can render existing products
obsolete and unmarketable. Telegen's success will be dependent in part upon its
ability to anticipate changes in technology and industry standards and to
successfully develop and introduce new and enhanced products on a timely basis.
If Telegen is unable to do so, Telegen's results of operations will be
materially adversely affected. For example, Telegen took a longer period time
than expected to develop its ACS product line. Although Telegen believes such
delay has not materially affected its ability to market and sell the ACS
products, there can be no assurance that Telegen will not encounter other
technical or similar difficulties that could in the future delay the
introduction of new products or product enhancements. See "Telegen - Business of
Telegen". With regard to its flat panel display technology, there are other more
developed and accepted flat panel display technologies already in commercial
production which will compete with Telegens technology. There can be no
assurance that Telegen will be successful in the development of its flat panel
technology or that Telegen will not encounter technical or other serious
difficulties in its development or commercialization which would materially
adversely affect Telegen's results of operations.
Dependence Upon Key Personnel
Telegen's future success will depend in significant part upon the continued
service of certain key technical and senior management personnel, and Telegen's
ability to attract, assimilate and retain highly qualified technical, managerial
and sales and marketing personnel. Competition for such personnel is intense,
and there can be no assurance that Telegen can retain its existing key
managerial, technical or sales and marketing personnel or that it can attract,
assimilate and retain such employees in the future. The loss of key personnel or
the inability to hire, assimilate or retain qualified personnel in the future
could have a material adverse effect upon Telegen's results of operations. See
"Telegen - Business of Telegen".
Telegen has entered into agreements with each of its executive officers (as
well as all other full-time employees) that prohibit disclosure of confidential
information to anyone outside of Telegen both during and subsequent to
employment and require disclosure and assignment to Telegen of all proprietary
rights to any ideas, discoveries or inventions relating to or resulting from the
officer's work for Telegen.
Telecommunications Competition
The market for telephone peripheral equipment is highly competitive, is
dominated by successful niche marketers and Telegen expects this competition to
continually increase. There are a number of companies which develop, manufacture
and sell telecommunications devices which perform some of the same functions as
those of Telegens products. There can be no assurance that Telegen will be able
to compete effectively against its competitors, many of whom may have
substantially greater financial resources than Telegen. See
"Business-Competition". Further, some of the telephone call routing functions of
Telegen's products can be provided through reprogramming by Bell Operating
Companies of their Central Office equipment to allow "equal access" by customers
to the long distance carrier of their choice without "dialing around" by
inserting an access code. Since this "dial around" process is the principal
function of Telegen's ACS 2000 and MLD 1000 products, if such an "equal access"
feature were introduced, demand for Telegens present products would be
seriously impaired.
Dependence on Major Customers
Telegen expects that a large proportion of its revenues from its
telecommunications products will be realized from sales to a small number of
companies, primarily the major long distance carriers such as AT&T, MCI, Sprint
and LDDS as well as the Regional Bell Operating Companies such as Bell Atlantic
and SBC. The loss of one or more of these relationships could have a material
negative effect on Telegen's results of operations.
Telegen's largest single customer during 1995 was Bell Atlantic, which
purchased Telegen's TeleBlocker product. Bell Atlantic provided $65,890 in
revenues, or approximately 45% of Telegen's total sales for 1995. Additionally,
sales to SynerNet, Inc. and Sprint of $29,297 and $24,833, respectively, in 1995
accounted for approximately 20% and 17%, respectively, of Telegen's total sales
in 1995.
Sales to Bell Atlantic are expected to be lower for 1996 since Telegen's
TeleBlocker was taken off the market to redesign the product to be produced with
alternative components in lieu of a major electronic component of TeleBlocker
that is no longer available. In March 1996, Telegen and MCI entered into a
contract which provides for a minimum delivery of 6,000 ACS 2000 units over the
following 12 months. Sales of such units would represent approximately $380,000
in revenues, or a majority of Telegen's anticipated sales during 1996. However,
there can be no assurance that such revenue from MCI will ultimately be
realized.
Flat Panel Competition; Flat Panel Patent(s)
The market for flat panel displays is dominated by major Japanese companies
such as Sharp Electronics, Toshiba and Sony. Telegen expects this competition to
continually increase. There can be no assurance that Telegen will be able to
compete effectively against its competitors, many of whom may have substantially
greater financial resources than Telegen. Flat panel displays manufactured
utilizing AMLCD technology have been in production for almost 10 years and have
proven market acceptance. New technologies, such as FED and Color Plasma, are in
development by a number of potential competitors, some of whom have greater
financial resources than Telegen. There can be no assurance that Telegens HGED
technology can compete successfully on a cost or display quality basis with
these other technologies. Further, there can be no assurance that Telegens
efforts to obtain patent protection for its HGED technology will be successful
or, if patent protection is obtained, that Telegens patent(s) will provide
adequate protection.
Future Capital for Flat Panel Development and Production
While Telegen believes it has the capital needed to complete development of
a finished prototype of the HGED technology, additional capital will be needed
to establish a high volume production capability. There can be no assurance that
any additional financing will be available to Telegen on acceptable terms, if at
all. If adequate funds are not available as required, Telegen's results of
operations from the flat panel technology will be materially adversely affected.
Dependence Upon Limited Number of Manufacturing Sources and Component Suppliers
Telegen currently relies upon a limited number of manufacturing sources for
its telecom production capability. Although Telegen is currently seeking to
qualify alternative sources of supply, Telegen has not yet contracted for
alternative suppliers to perform such manufacturing activities. In the event of
an interruption of production or delivery of supplies, Telegen's ability to
deliver its products in a timely fashion would be compromised, which would
materially adversely affect Telegen's results of operations. Certain components
used in Telegen's telecommunications products, such as microprocessors, are
available from only a limited number of sources. Although to date Telegen has
generally been able to obtain adequate supplies of these components, Telegen
obtains these components on a purchase order basis and does not have long-term
contracts with any of these suppliers. In addition, some suppliers require that
Telegen either pre-pay the price of components being purchased or establish an
irrevocable letter of credit for the amount of the purchase. Telegen anticipates
that, as it begins manufacture of other products, it will encounter similar
limitations regarding the components for those products. Telegen's inability in
the future to obtain sufficient limited-source components for its
telecommunications and other products, or to develop alternative sources, could
result in delays in product introductions or shipments, which could have a
material adverse effect on Telegen's results of operations. See "Telegen -
Business of Telegen".
Need to Develop Marketing Experience
Telegen has limited marketing experience, and expanding Telegen's markets
will require significant expenses, including additions to personnel. There can
be no assurance that Telegen will have all the capital resources necessary to
expand its sales and marketing operations, or that Telegen's attempts to expand
its sales and marketing efforts will be successful. See "Telegen - Business of
Telegen".
Intellectual Property
Telegen relies on a combination of patents, trade secret and other
intellectual property law, nondisclosure agreements and other protective
measures to preserve its rights pertaining to its products. Such protection,
however, may not preclude competitors from developing products similar to those
of Telegen. In addition, the laws of certain foreign countries do not protect
Telegen's intellectual property rights to the same extent as do the laws of the
United States. There can also be no assurance that third parties will not assert
intellectual property infringement claims against Telegen. Litigation related to
such matters is currently pending against Telegen and there is no assurance that
more will not be initiated from litigants with more resources than Telegen.
There is no assurance that Telegen will prevail in such litigation seeking
damages or an injunction against the sale of Telegen's products or that Telegen
will be able to obtain any necessary licenses on reasonable terms or at all. See
"Telegen - Business of Telegen".
Dispute Over Canceled Shares
In August 1991, Telegen 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 Telegen. A letter of credit in
the amount of $300,000 was issued in favor of Telegen by Bank Sadarat but
Telegen was unable to realize any benefit from such a letter of credit. In
September 1992, Bank Sadarat filed a complaint against Telegen 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, Telegen
cancelled the 208,592 shares issued to Sahara and filed a cross-complaint for
declaratory relief against Sahara and others. In that action, Telegen sought a
judicial declaration that the issuance of the aforementioned shares was void for
lack of consideration, that the action of Telegen in cancelling such shares was
valid and that the persons to whom such shares were issued have no rights as
shareholders of Telegen. The case was removed to the Federal District Court for
the Northern District of California. In July 1996, Telegen 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 Telegen's Financial
Statements included elsewhere herein. The dispute with Sahara regarding the
cancelled shares has not yet been resolved. The number of shares and percentages
of the outstanding shares referred to in this Registration Statement reflect the
cancellation of the 208,592 shares issued to Sahara. Although Telegen management
currently believes that the reissuance of 208,592 shares to Sahara would not
have a material adverse effect on the financial condition or operations of
Telegen, there can be no assurance as to the ultimate result of the litigation
with Sahara. See "Telegen - Legal Proceedings".
No Public Market
No public market exists for the securities of Telegen, and there can be no
assurance that a public market will develop for such shares. The private
placement memorandum provided to the offerees in the private placement of
1,334,450 shares of Telegen common stock completed in May 1996 disclosed the
pending Acquisition and the contemplated filing of the Registration Statement of
which this Information Statement-Prospectus is a part. To avoid the uncertainty
of whether the private placement should be deemed an integrated transaction with
the Acquisition or the public offering of shares of common stock without an
effective registration statement, the certificates for the 1,334,450 shares of
SERC common stock to be received, if the Acquisition is consummated, by the
purchasers of Telegen common stock in the private placement completed in May
1996 shall bear a restrictive legend which will operate to prevent the transfer
of such SERC stock, unless such stock is separately registered through the
filing of a registration statement under the Securities Act of 1933 (the "1933
Act"), or except for transfers in accordance with Rule 144 of the 1933 Act.
However, the currently required two-year holding period under Rule 144 with
respect to the above mentioned private placement purchasers is deemed to
commence on the date that such purchasers acquired the underlying Telegen common
stock. It is currently expected that any resale of such SERC shares occurring
prior to the expiration of the currently required two-year holding period will
be separately registered through the filing of a registration statement under
the 1933 Act.
Effect of SERC Merger
Pursuant to the terms of the Agreement, the holders of Telegen's
outstanding common stock will receive upon consummation of the Acquisition one
share of SERC common stock for each share of Telegen common stock held by them
immediately prior to the Acquisition. Correspondingly, the holders of Telegen's
outstanding Series A preferred stock will receive one share of SERC's Series A
preferred stock for each share of Telegen Series A preferred stock held by them
immediately prior to the Acquisition.
Although SERC is currently subject to the informational reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the Acquisition has been structured such that Telegen shareholders
will receive registered securities of SERC, if the Acquisition is not
consummated, the Telegen shareholders will be able to transfer their interests
in Telegen only in accordance with the requirements of the 1933 Act and
applicable state securities laws. As discussed in the "No Public Market" section
immediately above, the certificates for the 1,334,450 shares of SERC common
stock to be received, if the Acquisition is consummated, by the purchasers of
Telegen common stock in the private placement completed in May 1996 shall bear a
restrictive legend which will operate to prevent the transfer of such SERC
stock, unless such stock is separately registered through the filing of a
registration statement under the 1933 Act, for a period of two years from the
date that such purchasers acquired the underlying Telegen common stock. It is
currently expected that any resale of such SERC shares occurring prior to the
expiration of the two year period will be separately registered through the
filing of a registration statement under the 1933 Act.
No Requirement to File Exchange Act Reports
Until the completion of the planned Acquisition of Telegen by SERC, Telegen
will not be subject to the informational reporting requirements of the Exchange
Act. Accordingly, in the absence of such Acquisition, Telegen is not required to
file quarterly and annual reports on Forms 10-Q and 10-K in accordance with the
provisions of the Exchange Act, nor will it be subject to the regulations
promulgated by the Securities and Exchange Commission pursuant to the Exchange
Act. Upon completion of the planned Acquisition of Telegen by SERC, Telegen will
become subject to the regulations and provisions of the Exchange Act. However,
there can be no assurance that the Acquisition will be completed or that at any
time in the future Telegen will otherwise become subject to the reporting
requirements of the Exchange Act, and as a result, investors may have less
access to financial and other information concerning Telegen than they would if
Telegen were subject to the reporting requirements of the Exchange Act.
<PAGE>
INTRODUCTION
This Information Statement-Prospectus is being furnished in connection with
a Special Meeting of the Shareholders of SERC to be held on September 27, 1996,
and at any adjournments thereof, to consider and vote upon the following
matters:
1. Approval of the Agreement and Plan of Reorganization, as amended (the
"Agreement"), by and among SERC, Telegen Corporation, a California
corporation ("Telegen"), Solar Energy Research Corp. of California, a
California corporation and wholly owned subsidiary of SERC ("SERC
California"), and Telegen Acquisition Corporation, a California corporation
and wholly owned subsidiary of SERC ("TAC"), pursuant to which SERC
California, after giving effect to the proposed redomiciliation of SERC as
a California corporation through a merger of SERC with and into SERC
California, will acquire all of Telegen's outstanding capital stock through
a merger of TAC with and into Telegen with Telegen thereby becoming a
wholly owned subsidiary of SERC California (the "Acquisition"). In the
Acquisition, all of the shares of common stock and preferred stock of
Telegen would be converted into the right to receive shares of common stock
and Series A preferred stock of SERC California (after giving effect to the
redomiciliation of SERC as a California corporation and the one
share-for-seven and one-fourth shares (1 for 7.25) reverse split of the
currently issued and outstanding SERC common stock as outlined in the
proposals below), all on the terms and conditions set forth in the
Agreement which appears as an exhibit to the accompanying Information
Statement-Prospectus.
2. Approval of the merger of SERC with and into SERC California to effect
a redomiciliation of SERC as a California corporation.
3. Ratification of the one share-for-seven and one-fourth shares (1 for
7.25) reverse split of the currently issued and outstanding shares of
SERC's common stock approved by the Board of Directors.
4. Election to the SERC California Board of Directors of the six current
Telegen directors to fill the vacancies resulting from the
resignations of the current SERC directors pursuant to the terms of
the Agreement.
5. Approval of an amendment to the Articles of Incorporation to change
the name of SERC California to Telegen Corporation.
6. To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
This Information Statement-Prospectus is first being mailed to shareholders
of SERC on or about August 27, 1996.
A principal shareholder of SERC and a member of SERC management, who
beneficially owns 53.7% of outstanding SERC common stock, will vote in favor of
each of the proposals listed above. Accordingly, each of the above proposals
will be approved by the required affirmative vote.
THE MANAGEMENT OF SERC IS NOT SOLICITING PROXIES FROM SERC SHAREHOLDERS AND
THE SHAREHOLDERS ARE REQUESTED NOT TO SEND A PROXY.
<PAGE>
THE ACQUISITION
The description of the terms and conditions of the Acquisition and any
related document in this Information Statement-Prospectus is qualified in its
entirety by reference to the copy of the Agreement and Plan of Reorganization,
as amended (the "Agreement"), which appears as an exhibit to the Information
Statement-Prospectus.
The Agreement provides for the acquisition by SERC California, after giving
effect to the proposed redomiciliation of SERC as a California corporation
through a merger of SERC with and into SERC California, of all of Telegen's
outstanding capital stock through a merger of TAC with and into Telegen with
Telegen thereby becoming a wholly owned subsidiary of SERC California, by way of
an exchange of Telegen common stock and preferred stock for SERC California
common stock and Series A preferred stock, respectively (after giving effect to
the proposed redomiciliation of SERC as a California corporation and the
proposed one share-for-seven and one-fourth shares (1 for 7.25) reverse split of
the currently issued and outstanding SERC common stock). The Agreement provides
that the Acquisition, which will become effective upon the closing, will be
consummated by SERC California's issuance of one (1) share of its common stock
(after giving effect to the one share-for-seven and one-fourth shares (1 for
7.25) reverse split of the issued and outstanding SERC common stock as outlined
in the proposals for the Special Meeting of Shareholders) for each share of
Telegen common stock issued and outstanding at the closing. In addition, SERC
will issue one (1) share of its Series A preferred stock for each share of
Telegen preferred stock issued and outstanding at the closing. Further, SERC
will issue one option to acquire a share of SERC's common stock in exchange for
each outstanding option to acquire a share of Telegen common stock. The exercise
price of such options to acquire SERC's common stock will be the current
exercise price of the outstanding options to acquire Telegen common stock. As of
July 31, 1996, there were 4,433,455 shares of Telegen common stock and 112,750
shares of Telegen Series A preferred stock (convertible at the holder's
discretion of the holders into shares of common stock at the rate of two shares
of common stock for each share of Series A preferred stock) issued and
outstanding, as well as options to purchase 706,281 shares of Telegen common
stock at a weighted average exercise price of $4.99 per share, and warrants to
purchase 133,440 shares and 75,500 shares of Telegen common stock for $3.50 per
share and $.01 per share, respectively. The Telegen Board of Directors has
approved the Agreement.
The Parties
SERC. SERC, which was incorporated in Colorado on December 21, 1973, was
formerly engaged in the business of designing, marketing and servicing solar
heating systems. In December 1981, SERC reduced its solar business. SERC
discontinued its solar business in 1983 due to continued losses. The solar
industry segment serviced by SERC generally closed in 1985 with the termination
of Federal Solar Tax Credits. SERC has not provided service to any solar
customers since 1983 and is presently a development stage corporation. SERC's
primary activity during the period from 1985 through the end of 1992 was the
settling of various judgments relating to the discontinued solar business. Since
that time, SERC, which is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), has been
actively searching for an operating business or businesses to acquire. SERC's
corporate offices are located at 10075 East County Line Road, Longmont, Colorado
80501; (303) 772-3316. SERC owns all of the capital stock of SERC California and
Telegen Acquisition Corporation. SERC California was organized by SERC for the
purpose of effecting a redomiciliation of SERC as a California corporation to
facilitate the Acquisition. Telegen Acquisition Corporation was organized by
SERC for the purpose of effecting the acquisition by SERC of all of the
outstanding capital stock of Telegen with Telegen thereby becoming a wholly
owned subsidiary of SERC (the "Acquisition").
Telegen. Telegen, which was incorporated in California on May 3, 1990, is a
privately owned, multi-faceted, high technology company with unique and
proprietary products, both developed and in development, in the
Telecommunications, Flat Panel Display and Internet Hardware markets. At
present, Telegen is organized into four divisions. The Telecom Products Division
("TPD") develops, manufactures and markets a line of intelligent
telecommunications products, providing advanced features to existing telephone
equipment and unique services for consumers and small businesses. Telegen
Display Laboratories, Inc. ("TDL"), a subsidiary of Telegen, has developed a
unique, low-cost flat panel display technology to compete with other types of
flat panel displays. The Internet Products Division ("IPD"), Telegen's newest
division, is developing low-cost, easy-to-use hardware platforms which will
allow consumers and small businesses to utilize specialized capabilities of the
Internet without the need for a computer. Finally, Telegen Laboratories is an
advanced R&D think tank, developing new products and technologies, which are
then manufactured and marketed through one of the operating divisions. Telegen's
corporate offices are located at 353 Vintage Park Drive, Foster City, California
94404; (415) 349-3220.
SERC California. SERC California, a wholly owned subsidiary of SERC, was
formed for the purpose of effecting a redomiciliation of SERC as a California
corporation to facilitate the Acquisition as described above and has engaged in
no activities other than activities incidental to the Acquisition.
Telegen Acquisition Corporation. TAC, a wholly owned subsidiary of SERC,
was formed to facilitate the Acquisition as described above and has engaged in
no activities other than activities incidental to the Acquisition.
Background of the Acquisition
Since approximately 1992, SERC has engaged solely in the business of
searching for acquisitions and/or mergers in an effort to recommence operations.
Management has focused on locating a company with operations or products which
SERC could acquire to form the basis of an operating entity. In furtherance of
this goal, management determined to file a registration statement on Form 10
during July 1992 based on its belief that it would be more attractive to a
potential merger candidate if it was a reporting company at the time of the
completed transaction. The basis of this belief was comments received from
several potential merger candidates. As part of management's search, they
periodically placed an advertisement in the Wall Street Journal and generally
discussed the structure of their public development stage corporation with
persons they believed would possibly come in contact with people or
organizations who were searching for a reporting dormant corporation. SERC
management has received responses to its advertisements in the Wall Street
Journal which indicated general preliminary interest in SERC's status as a
publicly reporting company. However, no formal proposals of the terms of an
acquisition emanated from such responses, other than from the Telegen response
discussed below, primarily because the responding entities either did not show
the adequate promise sought by management, failed to stand up to scrutiny during
preliminary due diligence inquiries, failed to establish the validity of the
business concept, or failed to demonstrate the ability of the responding
entity's management to carry out the concept under the circumstances.
During the spring of 1995, SERC explored acquiring the assets of Carlton
Terry Oil Company ("Carlton Terry"). Those negotiations evolved to include the
consideration of a $2 million private placement to be effected through brokers
with whom SERC and Carlton Terry were acquainted. The funds to be raised through
such private placement were planned for the payment of debt and to drill an oil
well. SERC's negotiations broke off in late May 1995 following the decision by
Carlton Terry to pursue an alternative transaction. Several brokers who had
expressed an interest in the proposed SERC - Carlton Terry transaction indicated
an interest in considering a similar funding mechanism if an attractive target
company could be located by SERC.
In June 1995, SERC placed its ad in the "business opportunity" section of
the Wall Street Journal. Mr. Warren Dillard, Chief Operating Officer of Telegen,
spotted this ad and on June 22 responded by way of letters to SERC. Thereafter,
James Wiegand, president of SERC, communicated on a few occasions with Mr.
Dillard obtaining copies of financial statements and a private placement
memorandum which had been utilized for a private placement. After review of all
the documentation requested by Mr. Wiegand, SERC determined to visit the Telegen
plant. In an effort to conserve capital, a close friend of Mr. Wiegand who lived
near the Telegen plant site made the initial visit on behalf of SERC in
mid-July. Mr. Wiegand's friend responded very favorably to the visit and Telegen
and SERC commenced negotiations for a letter of intent. None of the directors or
affiliates of SERC or Telegen had any prior dealings or contact with any
affiliates of the other company prior to Telegen's introduction to SERC on June
22, 1995 and all negotiations were carried on at arm's length without the
assistance of any third parties.
After several drafts of the letter of intent were discussed, Mr. Wiegand on
behalf of SERC flew to the Telegen corporate headquarters on or about August 9,
1995 with the execution draft. Upon being satisfied that the technology and
prospects of Telegen were in line with his expectations, the parties signed a
letter of intent on August 9, 1995. Subsequent to entering into the letter of
intent, the parties contacted their attorneys and auditors in an effort to
conceptualize the efforts necessary to complete the transaction in accordance
with the desires of the parties and the fees and costs which would be entailed
to accomplish same. Based on these discussions, on September 27, 1995 the
parties entered into Amendment No. 1 to the Letter of Intent which added
provisions for the raising of approximately $100,000 by SERC to be utilized by
both parties to cover the expenses of the transaction, including the expenses
for filing the Form S-4 registration statement of which this Information
Statement-Prospectus is a part. The amendment also included the original
agreement of the parties related to the cancellation of the transaction by
Telegen, whereby Telegen was required to repay to SERC at the time of the
cancellation any funds which had been advanced by SERC for the payment of
Telegen's or its expenses to the date of that cancellation in order to make SERC
whole. This cancellation provision does not apply, however, to a cancellation by
Telegen for "cause."
Almost immediately after the amendment to the letter of intent was entered
into in September 1995, the parties' counsel commenced drafting and negotiating
the final terms of a proposed agreement and plan of reorganization which was
formerly approved by the Boards of Directors of both Telegen and SERC and
executed on November 16, 1995. A prerequisite to the Board of Directors'
approval by Telegen was that the agreement provided that the securities issued
to the Telegen shareholders would be issued without restrictive legend. The
parties originally decided to accomplish this by relying on the exemption from
registration contained in Section 3(a)(10) of the Securities Act of 1933, as
amended (the "Securities Act").
On January 25, 1996, SERC filed an application with the Department of
Corporations for the State of California under the Corporate Securities Law of
1968 seeking a permit qualifying the issuance of the SERC shares following a
public hearing to be conducted by the California Commissioner of Corporations.
Subsequently, however, this application was withdrawn and the parties determined
to file a registration statement on Form S-4 of which this Information
Statement-Prospectus is part.
In preparation for the filing of the Form S-4, the parties decided that it
was in their best interests to amend the agreement to update the parties'
understanding relative to the issues included in the S-4 registration statement.
Additionally, from August 9 through mid-January, various items had changed
slightly so that when the amendment was accomplished, incorporated in that
amendment were updates to describe the current status of the parties. These
amendments, which are included in the First Amendment dated as of January 18,
1996 to the Agreement and Plan of Reorganization included reference to the
completion of negotiations for the Telegen bridge and private placement
financing, the slight increase of the amount of private placement financing to
be accomplished by SERC in order to fully fund the acquisition process and the
addition of indemnification provisions relative to Mr. Wiegand intended to give
comfort to the Telegen Board of Directors that there were no undisclosed
liabilities of SERC. These amendments included the provision of the pre-closing
approval by the shareholders of SERC of all of the propositions required in the
agreement, including the approval of the acquisition of Telegen and appointment
of the Telegen board as the board of SERC, the name change from SERC to Telegen,
the approval of the reverse split of one share for each 7.25 shares outstanding
and the redomiciliation of SERC into the State of California. In addition, a
Second Amendment dated as of April 9, 1996 to the Agreement and Plan of
Reorganization provides for, among other things, (i) the additions of the
conditions that a registration statement on Form S-4 must be filed by SERC, be
declared effective by the SEC and shareholder approval of SERC shall be obtained
prior to closing as conditions precedent to the obligation of Telegen to effect
the closing; (ii) the reincorporation of SERC as a California corporation at or
prior to the Effective Time of the Acquisition and substituting the newly formed
California corporation as the corporation subject to the informational reporting
requirements of the 1934 Act; and (iii) the increase from $130,000 to $200,000
in the amount Telegen shall reimburse SERC should Telegen cancel the Agreement
for any reason other than the failure of SERC to cure any breach of its
representations and warranties or to promptly close and permitting additional
fund raising activity on behalf of both SERC and Telegen; (iv) the extension of
the date beyond which either Telegen or SERC may terminate the Agreement from
April 30, 1996 to August 31, 1996; and (v) the requirement for audited Telegen
financial statements for the year ended December 31, 1995. Further, a Third
Amendment dated as of July 10, 1996 to the Agreement and Plan of Reorganization
provides for, among other things, (i) the extension of the date beyond which
either Telegen or SERC may terminate the Acquisition Agreement from August 31,
1996 to September 30, 1996 and (ii) the decrease in the amount that Telegen
shall reimburse to SERC should Telegen cancel the Acquisition Agreement for any
reason other than the failure of SERC to cure a breach of SERC's representations
and warranties or to promptly close from a maximum of $200,000 to an amount of
approximately $172,000. Also, a Fourth Amendment dated as of August 13, 1996 to
the Agreement and Plan of Reorganization provides for, among other things, the
addition of restrictions on the transferability of the SERC California common
stock to be issued in connection with the Acquisition to the purchasers of
Telegen Common stock pursuant to a private placement memorandum dated February
15, 1996.
SERC believes that Telegen will realize various benefits from the
reorganization by eliminating certain cost uncertainties, including general
stock market uncertainties that could negatively impact the successful sale of
new stock, which are associated with conducting a public offering pursuant to
the Securities Act through an underwriter. SERC and Telegen have actively
pursued and have established broker/dealer interest in making a market for
SERC's securities once the Acquisition is consummated and believe that a market
will develop, given that the private placement of Telegen shares raised
sufficient proceeds such that post-Acquisition SERC should have adequate assets
to allow it to qualify for the NASDAQ Small Cap Market. Further, Telegen has
developed and has in place prospective traders and market makers for the
post-Acquisition securities of SERC.
Telegen intends to apply for listing on the NASDAQ Small Cap market system
after the Registration Statement on Form S-4 of which this Information Statement
- -Prospectus is a part becomes effective. As a result of the Acquisition, it is
expected that SERC will (i) have in excess of $4 million in gross tangible
assets (ii) in excess of and $2 million in tangible net worth, (iii) at least
300 holders of SERC common stock and (iv) at least 100,000 publicaly held shares
of SERC common stock and thus, assuming that two registered and active market
makers are obtained and the securities will have a minimum bid price of $3 per
share, will satisfy the requirements for listing on the NASDAQ Small Cap market
system. However, there can be no assurance that a listing on the NASDAQ Small
Cap market system will be obtained.
Based on Management's expectations of the total shares to be outstanding
subsequent to the acquisition on a fully diluted basis, the current shareholders
of SERC will retain approximately 4.3% of the total issued and outstanding
common shares immediately after the Acquisition while providing what is
estimated to be a total of less than 1% of the total assets of the combined
companies on a proforma basis. During the negotiations of the structure of the
Acquisition in the latter part of 1995, a range of forecasted Telegen revenues
and earnings per share for 1996 was presented by the management of Telegen to
the management of SERC, and the parties agreed that a reasonable mid-point of
the range was approximately $.81 per share for 1996. Accordingly, from the
Telegen earnings per share estimate of approximately $.81, for which there is
now substantial doubt, based on Telegen's unaudited net loss of $1,446,952 for
the six months ended June 30, 1996, that actual Telegen results for 1996 will
reach, SERC management determined and Telegen management agreed that the
estimated market value of the combined companies should be approximately $14.50
per share on or before December 31, 1997, based on a price-earnings multiple of
18, which the parties agreed at that time was a reasonable multiple since it
approximated the average price-earnings multiple for companies in Telegen's
industry that were publicly traded. Because (i) the Telegen forcasts were from
documents internally generated for planning purposes only and accordingly did
not present in detail the underlying assumptions necessary to facilitate
verification, and (ii) any estimate of future revenues and earnings is
inherently subject to assumed levels of activity which may or may not actually
be realized, or which may take longer than expected to be realized, the parties
agreed to price protection provisions which reflect a two-year period ending
December 31, 1997 during which Telegen can meet the annual earnings per share
level of $.81 discussed above, for the protection of the current shareholders of
SERC against material differences between forecasts presented during the
negotiations of the value of Telegen and actual results whereby additional
shares will be issued to the shareholders of record of SERC on the date of
closing if the closing bid price of the combined companies, as adjusted for
stock splits and similar events, as reported either in the pink sheets, the
Bulletin Board maintained by NASDAQ, on NASDAQ or any national stock exchange
does not equal or exceed $14.50 per share on any ninety trading days for the
period commencing on the closing date and ending December 31, 1997 (the "Price
Protection Period"). Should the pricing fail to satisfy this provision,
additional shares will be issued to each of the current SERC shareholders based
on a formula hereinafter more fully described.
The reorganization has been structured such that Telegen shareholders will
receive registered securities. However, to avoid the uncertainty of whether the
private placement of 1,334,450 shares of Telegen common stock completed in May
1996 should, in part as a result of the disclosure in the related private
placement memorandum of the pending Acquisition and contemplated filing of the
Registration Statement of which this Information Statement-Prospectus is a part,
be deemed an integrated transaction with the Acquisition or the public offering
of shares of common stock without an effective registration statement, the
certificates for the 1,334,450 shares of SERC common stock to be received, if
the Acquisition is consummated, by the purchasers of Telegen common stock in the
private placement completed in May 1996 shall bear a restrictive legend which
will operate to prevent the transfer of such SERC stock, unless such stock is
separately registered through the filing of a registration statement under the
Securities Act of 1933 (the "1933 Act"), for a period of two years from the date
that such purchasers acquired the underlying Telegen common stock. It is
currently expected that any resale of such SERC shares occurring prior to the
expiration of the two year period will be separately registered through the
filing of a registration statement under the 1933 Act.
If a trading market again develops for SERC's common stock, Telegen
shareholders, other than the purchasers of 1,334,450 shares of Telegen common
stock in the private placement completed in May 1996, will own "publicly traded"
as opposed to "privately-held" securities. SERC believes that shares in a
publicly traded company could have an increased value as they are more liquid
and in some instances may be used by Telegen as payment for additional assets or
businesses that it may wish to acquire in the future.
The officers and directors of SERC have not conducted market research and
are not aware of statistical data which would support the perceived benefits of
a merger or acquisition transaction to Telegen shareholders. Additionally,
neither of the parties to the transaction had the benefit of an independent
evaluation of the fairness and reasonableness of the terms and conditions of the
transaction, but are relying solely on their arm's-length negotiations.
Current management of SERC has agreed to resign upon closing of the
reorganization and will not participate in future management unless invited to
do so.
The parties have retained the services of counsel and accountants in order
to properly effect the Acquisition. Through May 31, 1996, approximately $172,000
in legal and accounting fees had been incurred in connection with the
Acquisition. It is anticipated that an additional $98,000 will be spent on legal
and accounting fees to consummate the Acquisition. The parties believe that the
cash presently available to Telegen, which under the Agreement must pay for all
expenses related to the Acquisition incurred subsequent to May 31, 1996, is
adequate to cover all anticipated remaining expenses.
Summary of the Agreement
Introduction. The terms of the Acquisition are contained in the Agreement,
a copy of which appears as an exhibit to this Information Statement-Prospectus.
The statements in this Information Statement-Prospectus with respect to the
terms of the Acquisition are qualified in their entirety by reference to the
Agreement.
Under the Agreement, SERC California will acquire the capital stock of
Telegen with Telegen thereby becoming a wholly owned subsidiary of SERC
California.
Effective Time of the Acquisition. The Agreement provides that, as soon as
practicable on or after the closing, the parties are to cause the Acquisition to
be consummated by filing with the Secretary of State of the State of California
any documents required by law to effectuate the Acquisition. The Acquisition
shall be effective at the time such documents are duly filed and accepted for
record by the California Secretary of State (the "Effective Time").
Exchange Ratio of Telegen Common and Preferred Stock. At the Effective
Time, (i) each share of Telegen common stock issued and outstanding immediately
prior to the Effective Time shall, by virtue of the Acquisition and without any
action on the part of any holder, automatically be converted into, and
constitute a right to receive, one (1) share of SERC California common stock,
and (ii) each share of Telegen preferred stock issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Acquisition and
without any action on the part of any holder, automatically be converted into,
and constitute a right to receive, one (1) share of SERC California Series A
preferred stock.
Exchange of Certificates. As soon as practicable after the Effective Time,
United Stock Transfer, Inc. (the "Exchange Agent") shall mail to each holder of
record of Telegen common or preferred stock instructions for surrendering their
Telegen stock certificates (the "Old Telegen Certificates") in exchange for a
certificate or certificates representing the common or Series A preferred stock
of SERC California, which by then is expected to have changed its name to
Telegen (the "New Telegen Certificates"). Such instructions, which will include
a form letter of transmittal, shall specify that delivery of the New Telegen
Certificates shall be effected, and the risk of loss and title to the New
Telegen Certificates shall pass, only upon the Exchange Agent's receipt of the
Old Telegen Certificate from a holder of Telegen shares. Upon surrender of the
Old Telegen Certificate for exchange to the Exchange Agent, together with such
letter of transmittal and an Assignment Separate from Certificate duly executed
by the holder, the holder of such Old Telegen Certificate shall receive as soon
as possible in exchange therefor a New Telegen Certificate representing the SERC
California common or Series A preferred stock issuable pursuant to the
Acquisition.
From and after the Effective Time, the holders of Old Telegen Certificates
shall cease to have any rights as shareholders of Telegen, except the right to
enforce the obligation of SERC to issue the applicable number of shares of SERC
California common or Series A preferred stock as provided in the immediately
preceding paragraph.
Treatment of Telegen Stock Options. Outstanding options to purchase shares
of Telegen common stock issued and not previously exercised will be converted
into options to receive that number of shares of SERC California common stock as
equals the number of shares of Telegen common stock or Telegen preferred stock
for which such options were exercisable. All other terms of such options and
warrants shall remain in effect.
Conditions to the Acquisition. The obligations of SERC and Telegen to
consummate the Acquisition are subject to the satisfaction or waiver, at or
before the Effective Time, of certain conditions, including, but not limited to,
the following: (i) the registration statement on Form S-4 under the Securities
Act filed by SERC (the "Registration Statement") having become effective and no
stop order with respect to the Registration Statement being in effect or
threatened; (ii) neither SERC nor Telegen shall be subject to any order, decree
or injunction which enjoins or prohibits the consummation of the Acquisition;
and (iii) receipt by SERC of the requisite approval from the SERC stockholders
to consummate the Acquisition.
In addition to the conditions set forth in the first paragraph of this
subsection, the obligations of SERC to consummate the Acquisition are subject to
the fulfillment or waiver in writing by SERC of the following conditions: (i)
the representations and warranties made by Telegen being true in all material
respects; (ii) Telegen having performed all material agreements, obligations and
conditions contained in the Agreement required to be performed by it at or prior
to the Effective Time in all material respects; (iii) no material adverse
changes in the business, affairs, prospects, operations, properties, assets or
condition of Telegen and its subsidiaries, taken as a whole, having occurred;
(iv) all proceedings and documents in connection with the transactions
contemplated at the closing of the Acquisition being reasonably satisfactory to
SERC; and (v) all consents and approvals that in the reasonable opinion of
counsel for SERC are necessary to permit the Acquisition having been granted or
issued and having become effective.
In addition to the conditions set forth above, the obligations of Telegen
to consummate the Acquisition are subject to the fulfillment or waiver in
writing by Telegen of the following conditions: (i) the representations and
warranties made by SERC being true in all material respects; (ii) SERC having
performed all material agreements, obligations and conditions contained in the
Agreement required to be performed by it at or prior to the Effective Time in
all material respects; (iii) no material adverse changes in the business,
affairs, prospects, operations, properties, assets or condition of SERC, taken
as a whole, having occurred; (iv) all proceedings and documents in connection
with the transactions contemplated at the closing of the Acquisition being
reasonably satisfactory to Telegen; (v) all consents and approvals that in the
reasonable opinion of counsel for Telegen are necessary to permit the
Acquisition having been granted or issued and having become effective; (vi) the
SERC Board having amended the Articles of Incorporation of SERC pursuant to the
Agreement to effect a one share-for-seven and one-fourth shares (1 for 7.25)
reverse split of the common stock of SERC, and obtained the resignations of all
current SERC officers and directors, and shall have approved all necessary
resolutions such that immediately after the Effective Time, the current Telegen
directors will become members of the SERC California Board of Directors; and
(vii) the redomiciliation of SERC as a California corporation. See "SERC -
Matters to be Considered at the Special Meeting - Election of Directors" and " -
Description of the Agreement - Directors and Management of SERC Following the
Acquisition."
Certain Covenants. Pursuant to the Agreement, SERC has agreed that, during
the period between the execution of the Agreement and the Effective Time, it
will not engage in any practice, take any action, embark on any course of
inaction or enter into any transaction outside the ordinary course of business
without the consent of Telegen. In particular, SERC will not (i) declare, set
aside or pay any dividend or make any distribution with respect to its capital
stock or redeem, purchase or otherwise acquire any of its capital stock or (ii)
otherwise engage in any practice, take any action, embark on any course of
inaction or enter into any transaction which would result in a material adverse
change in the assets, liabilities, business, financial condition, operations,
results of operations or future prospects of SERC. In addition, SERC has agreed
that it shall not, without the prior written consent of Telegen, issue any
additional shares of any of its equity securities or any other securities
convertible into its equity securities. Further, SERC has terminated its
advertisements soliciting the interest of other potential target companies.
Pursuant to the Agreement, Telegen has agreed that during the period
between the execution of the Agreement and the Effective Time, Telegen will not
(i) declare, set aside or pay any dividend or make any distribution with respect
to its capital stock or redeem, purchase or otherwise acquire any of its capital
stock, (ii) otherwise engage in any practice, take any action, embark on any
course of inaction or enter into any transaction which would result in a
material adverse change in the assets, liabilities, business, financial
condition, operations, results of operations or future prospects of Telegen. In
addition, Telegen has agreed not to issue any equity securities without the
prior consent of SERC other than in connection with the bridge financing and the
private placement.
Nonsolicitation. The Agreement provides that neither party will, directly
or indirectly, or through representatives retained by such party, entertain or
enter into any agreement or understanding, or engage in any discussions with, or
furnish any information to, any person or entity, other than SERC or Telegen
with respect to any acquisition or merger transaction involving SERC or Telegen
or any of their subsidiaries. If Telegen receives any bona fide offer relating
to such a transaction, Telegen will provide SERC with immediate notice thereof
and shall not enter into any transaction or letter of intent with a third party
until SERC has the opportunity to discuss the opportunity and match or improve
upon the terms of such offer.
Representations and Warranties. The Agreement contains various
representations and warranties relating to, among other things: (i) each of
SERC's and Telegen's and certain of their respective subsidiaries' organizations
and similar corporate matters; (ii) each of SERC's and Telegen's and certain of
their respective subsidiaries; capital structures; (iii) the authorization by
SERC of the issuance of the SERC California common stock to the Telegen
shareholders; (iv) the corporate actions necessary for the execution of the
Agreement; (v) the accuracy of each of SERC's and Telegen's recent financial
statements and certain accounting matters; (vi) the absence of certain
liabilities; (vii) the absence of certain changes or events; (viii) legal
proceedings; (ix) the absence of certain labor controversies; (x) taxes; (xi)
retirement and other employee plans and matters relating to the Employee
Retirement Income Security Act of 1974, as amended; (xii) violations of law;
(xiii) title to property and sufficiency of assets; (xiv) ownership of patents,
trademarks, copyrights and other proprietary rights; (xv) compliance with
applicable U.S., federal, state and local laws and regulations; (xvi) accurate
disclosure of information, specifically the documents and reports filed by SERC
with the SEC and the accuracy of the information contained therein, and (xvii)
material agreements of SERC and Telegen.
Price Protection Provisions. Pursuant to the terms of the Agreement,
additional SERC California common shares are to be issued to those persons who
are shareholders of SERC immediately prior to the Effective Time (the "Protected
Shareholders") if the closing bid price of SERC California post-Acquisition (as
adjusted for stock splits and similar events), as reported in the Pink Sheets,
the Bulletin Board maintained by NASDAQ, or on the NASDAQ Stock Market or on a
national stock exchange, does not exceed or equal $14.50 per share on any ninety
trading days over the period occurring between the closing of the Acquisition
and December 31, 1997 (the "Price Protection Period"). If the closing bid price
does not exceed $14.50 for any ninety trading days over the Price Protection
Period, then additional SERC California shares will be issued under the
Agreement based on the average closing bid price for those ninety trading days
during the Price Protection Period with the highest average closing bid price
(the "Bid Price Factor"). Any SERC California common shares issued thereby are
to be distributed to the Protected Shareholders on a pro rata basis based on the
number of shares owned by each Protected Shareholder immediately prior to the
Effective Time. The number of additional shares to be distributed to the
Protected Shareholders, if any, is to be based on a formula whereby:
N = the number of shares to be issued
and N = (196,909 x (14.50 divided by Bid Price Factor)) - 196,909
(where 196,909 equals the number of
SERC common shares outstanding
immediately prior to the Effective Time
of the Acquisition, as adjusted to reflect
the proposed one share-for-seven and
one-fourth (1 for 7.25) reverse split of the
currently issued and outstanding shares of
SERC common stock)
The above formula has been adjusted to reflect the outstanding shares of
SERC common stock assuming shareholder approval of the one share-for-seven and
one-fourth shares (1 for 7.25) reverse split of the currently issued and
outstanding shares of SERC common stock approved by the Board of Directors. The
price protection formula is subject to adjustments for future changes in the
capitalization of SERC such as stock dividends and stock splits.
For purposes of the Registration Statement of which this Information
Statement-Prospectus is a part, 374,127 shares of SERC common stock are being
registered in connection with the possible issuance of such shares under the
price protection provisions. The share amount of 374,127 represents an estimate
based on the application of the above price protection formula using an
estimated Bid Price Factor of $5 per share, which is the share price received by
Telegen in connection with a private placement of in excess of 1.3 million
common shares completed in May 1996. To the extent that the number of shares, if
any, issued under the price protection provisions does not exceed 374,127, which
would be the result if the actual Bid Price Factor during the Price Protection
Period is no less than $5, the Protected Shareholders will receive shares
registered under the Registration Statement of which this Information
Statement-Prospectus is a part. To the extent that the number of shares issued
under the price protection formula exceeds 374,127, Telegen intends to satisfy
all state and federal securities laws in connection with the possible issuance
of such price protection shares, including the filing of a registration
statement under the Securities Act of 1933, if required.
Indemnity and Share Escrow. Pursuant to the terms of the Agreement, James
B. Wiegand, who currently is the principal shareholder of SERC, is to execute an
Indemnification Agreement with respect to any breaches of representations and
warranties or covenants under the Agreement by SERC. Telegen's sole and
exclusive recourse under such Indemnification Agreement will be to an escrow
established for such purpose into which Mr. Wiegand is to contribute 70,000
shares of SERC common stock, which number of shares is subject to adjustment
from stock splits or other adjustments.
Termination. The Agreement may be terminated prior to the Effective Time:
(i) by the mutual consent of SERC and Telegen; (ii) by either SERC or Telegen if
there has been a material breach of any representation, warranty, covenant or
agreement contained in the Agreement on the part of the other party set forth in
the Agreement and such breach of a covenant or agreement has not been promptly
cured; (iii) by either SERC or Telegen if the Acquisition shall not have been
consummated on or before September 30, 1996; (iv) by either SERC or Telegen if
(a) there shall be a final nonappealable order of a federal or state court in
effect preventing consummation of the Acquisition or (b) there shall be any
action deemed applicable to the Acquisition by any governmental entity which
would make a consummation of the Acquisition illegal; (v) by either SERC or
Telegen if there shall be any action taken, or any statute, rule, regulation or
order that would render SERC or Telegen unable to consummate the Acquisition,
except for any waiting period provisions.
Liability for Expenses Upon Termination. If the Agreement is terminated by
Telegen for any reason other than the failure of SERC to cure a breach of SERC's
representations and warranties or a failure to close the Acquisition on a timely
basis, Telegen must reimburse the actual legal fees and expenses incurred by
SERC and advanced to Telegen by SERC to assist Telegen in completion of the
Agreement through the date of termination, in an amount not to exceed $172,000.
Waiver and Amendment. The Agreement may, to the maximum extent permitted by
law, be amended by the written agreement of SERC and Telegen, by action taken by
their respective Boards of Directors. In addition, any term, provision or
condition of the Agreement may be waived in writing by the party which is
entitled to the benefits thereof.
Vote Required
To conserve resources, the Agreement was structured such that approval of
the Agreement by the shareholders of SERC and the shareholders of Telegen is not
required by law. However, the SERC Board of Directors has directed that the
Agreement be submitted to the shareholders of SERC for their approval as
outlined in the proposals for the Special Meetings of SERC shareholders. Since
SERC's principal shareholder, who beneficially owns 53.7% of the outstanding
SERC common stock entitled to vote on the Agreement, will vote in favor of the
Agreement, approval of the Agreement by a majority of SERC shares is assured.
Therefore, assuming that neither SERC nor Telegen terminates the Agreement, the
shareholders of Telegen will become shareholders of SERC California (after
giving effect to the proposed redomiciliation of SERC as a California
corporation) at the exchange rate of one share of SERC California common stock
(after giving effect to the proposed one share-for-seven and one-fourth (1 for
7.25) reverse split of the currently issued and outstanding shares of SERC
common stock) and one share of SERC Series A preferred stock for each issued and
outstanding share of Telegen common stock and preferred stock, respectively.
(See "The Agreement" and Availability of Appraisal Rights for Dissenting
Shareholders).
Availability of Appraisal Rights for Dissenting Shareholders
Under Colorado and California law, appraisal rights for dissenting
shareholders will not be available to the shareholders of SERC with respect to
the Acquisition since SERC is the acquiring entity in the Acquisition.
Under California law, appraisal rights for dissenting shareholders will not
be available to the shareholders of Telegen with respect to the Acquisition
since Telegen is being acquired by a California corporation and the Telegen
shareholders are receiving in exchange for their shares of Telegen shares of a
California corporation.
The SERC Board of Directors and Management Following the Acquisition
Pursuant to the terms of the Agreement, the SERC California Board of
Directors following the Acquisition is to be made up of the six current
directors of Telegen. Three of the current Telegen directors are independent
directors, as defined in the Rules of the National Associated of Securities
Dealers, Inc., and such independent directors are to be appointed to the Audit
and Compensation Committees of the SERC California Board of Directors.
Resale of SERC Common and Series A Preferred Stock
The shares of SERC California common and Series A preferred stock to be
issued to the shareholders of Telegen in connection with the Acquisition are
being registered under the Securities Act by the Registration Statement within
which this Information Statement-Prospectus is being included. In addition, for
purposes of the Registration Statement of which this Information
Statement-Prospectus is a part, 374,127 shares of SERC common stock are being
registered in connection with the possible issuance of such shares under the
price protection provisions. The share amount of 374,127 represents an estimate
based on the application of the above price protection formula using an
estimated Bid Price Factor of $5 per share, which is the share price received by
Telegen in connection with a private placement of in excess of 1.3 million
common shares completed in May 1996. To the extent that the number of shares, if
any, issued under the price protection provisions does not exceed 374,127, which
would be the result if the actual Bid Price Factor during the Price Protection
Period is no less than $5, the Protected Shareholders will receive shares
registered under the Registration Statement of which this Information
Statement-Prospectus is a part. To the extent that the number of shares issued
under the price protection formula exceeds 374,127, Telegen intends to satisfy
all state and federal securities laws in connection with the possible issuance
of such price protection shares, including the filing of a registration
statement under the Securities Act of 1933, if required. No lockup agreements
were required as a result of agreement to the Price Protection Provisions
contained in the Agreement.
The private placement memorandum provided to the offerees in the private
placement of 1,334,450 shares of Telegen common stock completed in May 1996
disclosed the pending Acquisition and the contemplated filing of the
Registration Statement of which this Information Statement-Prospectus is a part.
To avoid the uncertainty of whether the private placement should be deemed an
integrated transaction with the Acquisition or the public offering of shares of
common stock without an effective registration statement, the certificates for
the 1,334,450 shares of SERC common stock to be received, if the Acquisition is
consummated, by the purchasers of Telegen common stock in the private placement
completed in May 1996 shall bear a restrictive legend which will operate to
prevent the transfer of such SERC stock, unless such stock is separately
registered through the filing of a registration statement under the Securities
Act of 1933 (the "1933 Act"), for a period of two years from the date that such
purchasers acquired the underlying Telegen common stock. It is currently
expected that any resale of such SERC shares occurring prior to the expiration
of the two year period will be separately registered through the filing of a
registration statement under the Securities Act of 1933 Act.
Federal Income Tax Consequences of the Acquisition
A ruling from the Internal Revenue Service concerning the tax consequences
of the Acquisition has not been requested. While the parties have used their
best efforts to structure the Acquisition in such a manner as to minimize
federal and state tax consequences to SERC and Telegen through the Acquisition's
treatment for tax purposes as a "tax-free" reorganization under Section 368(a)
of the Internal Revenue Code of 1986, as amended, there can be no assurance that
the Acquisition will result in such tax treatment. However, since SERC is a
development stage company with essentially no operating assets and minimal net
worth, the parties believe that any taxable gain to be recognized on the receipt
of SERC's shares by the shareholders of Telegen would be insignificant.
Accordingly, the respective managements of SERC and Telegen believe that the tax
consequences of the Acquisition are not material to investors.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION PURPOSES ONLY. BECAUSE OF THE COMPLEXITIES OF FEDERAL INCOME TAX
LAWS, EACH TELEGEN SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR AS
TO THE SPECIFIC TAX CONSEQUENCES OF THE ACQUISITION TO HIM OR HER, INCLUDING
INCOME TAX RETURN REPORTING REQUIREMENTS AND THE APPLICABILITY AND EFFECT OF
STATE, LOCAL AND OTHER TAX LAWS.
Expenses of the Acquisition
SERC has advanced to Telegen and has incurred certain costs and expenses on
Telegen's behalf, including its legal and accounting fees, to assist Telegen in
the completion of the Acquisition. Should Telegen cancel the Agreement for any
reason other than a failure of SERC to cure a breach of SERC's representations
and warranties under the Agreement, Telegen is obligated under the Agreement to
reimburse SERC for such costs and expenses, and other expenses incurred by SERC
related to the Agreement, up to $172,000.
Comparison of Rights of Holders of SERC Stock Under Colorado and California Law
SERC and Telegen are incorporated under the laws of the States of Colorado
and California, respectively. As part of the Acquisition, it is intended that
SERC redomicile as a California corporation. As a result, the rights of SERC
shareholders which are currently governed by the laws of the State of Colorado
will be governed by the State of California. The corporation laws of Colorado
and California differ in many respects. In particular, the rights of
shareholders are materially different with respect to the removal of directors,
the classification of the board of directors, indemnification and limitation of
liability, inspection of shareholder lists, dividends and repurchase of shares,
shareholder voting, interested director transactions, shareholder derivative
suits, appraisal rights and dissolution. See "INFORMATION CONCERNING THE SERC
SPECIAL MEETING - Matters to be Considered at Special Meeting."
INFORMATION CONCERNING THE SERC SPECIAL MEETING
Matters to be Considered at Special Meeting
At the SERC Special Meeting of Shareholders, the SERC shareholders will
consider and vote upon the following matters:
1. Approval of an Agreement and Plan of Reorganization, as amended (the
"Agreement"), by and among SERC, Telegen Corporation, a California
corporation ("Telegen"), Solar Energy Research Corp. of California, a
California corporation and wholly owned subsidiary of SERC ("SERC
California"), and Telegen Acquisition Corporation, a California corporation
and wholly owned subsidiary of SERC ("TAC"), pursuant to which SERC
California will acquire all of Telegen's outstanding capital stock through
a merger of TAC with and into Telegen with Telegen thereby becoming a
wholly owned subsidiary of SERC California (the "Acquisition").
2. Approval of the redomiciliation of SERC as a California corporation.
3. Ratification of the one share-for-seven and one-fourth shares (1 for 7.25)
reverse split of the currently issued and outstanding shares of SERC common
stock approved by the Board of Directors.
4. Election to the SERC board of directors of the six current Telegen
directors to fill the vacancies resulting from the resignations of the
current SERC directors pursuant to the terms of the Agreement.
5. Approval of an amendment to the Articles of Incorporation to change the
name of SERC California to Telegen Corporation.
HOLDERS OF SERC STOCK ARE NOT BEING ASKED FOR A PROXY AND ARE REQUESTED NOT TO
SEND A PROXY.
Arrangements will be made with brokerage houses and other custodians,
nominees and fiduciaries for the forwarding of this Information-Prospectus to
the beneficial owners of stock held of record by such persons, and SERC will
reimburse such custodians, nominees and fiduciaries for reasonable out-of-pocket
expenses incurred in connection therewith. SERC is being assisted by ADP in this
regard.
A majority in interest of the common shareholders on the record date must
be present, in person or by proxy, at the Meeting to constitute a quorum. Each
share of common stock will carry one vote on each of both proposals described
below, as well as on any other matters which may properly come before the
Meeting.
So far as SERC is aware, no matters other than the ones outlined in this
Information Statement will be presented at the Meeting for action on the part of
the shareholders. If any other matters are properly brought before the Meeting,
the persons present will vote as they feel appropriate in accordance with their
best judgment.
The shares beneficially owned by James B. Wiegand, Chairman of the Board of
Directors and President of SERC, which total approximately 53.7% of the
outstanding shares, will be voted in favor of each of both proposals described
below. Therefore, all of the proposals will be approved by the required
affirmative vote.
1. Approval of the Acquisition. The Board of Directors of SERC have
approved and directed for submission to the SERC shareholders for approval the
Agreement and Plan of Reorganization, as amended (the "Agreement"), by and among
SERC, Telegen Corporation, a California corporation ("Telegen"), Solar Energy
Research Corp. of California, a California corporation and wholly owned
subsidiary of SERC ("SERC California"), and Telegen Acquisition Corporation, a
California corporation and wholly owned subsidiary of SERC ("TAC"), pursuant to
which: (i) SERC California (after giving effect to the proposed redomiciliation
of SERC as a California corporation) will acquire all of Telegen's outstanding
capital stock through a merger of TAC with and into Telegen with Telegen thereby
becoming a wholly owned subsidiary of SERC California (the "Acquisition"); (ii)
SERC California will issue one (1) share of its common stock (after giving
effect to the one share-for-seven and one-fourth shares (1 for 7.25) reverse
split of the issued and outstanding SERC common stock as outlined below) for
each share of Telegen common stock issued and outstanding at the closing; (iii)
SERC California will issue one (1) share of its Series A preferred stock for
each share of Telegen preferred stock issued and outstanding at the closing; and
(iv) SERC California will issue one option to acquire a share of SERC
California's common stock in exchange for each outstanding option to acquire a
share of Telegen common stock.
The SERC Board of Directors believes the Acquisition is in the best
interests of SERC and its shareholders due to a number of factors, including (i)
the enhanced business opportunities resulting from the acquisition of Telegen's
business; (ii) the assets, operations and prospects of Telegen; (iii) the
relative value of SERC capital stock resulting from SERC's status as a
development state corporation with substantial doubt abouts its ability to
continue as a going concern but subject to the informational reporting
requirements of the Exchange Act, as compared to the estimated value of Telegen
capital stock as incorporated into the price protection provisions of the
Agreement which protect the currant shareholders of SERC; and (iv) the belief
that the consideration proposed to be paid by SERC in the issuance of its shares
to acquire Telegen is fair to the shareholders of SERC from a financial point of
view. See "THE ACQUISITION - Background of the Acquisition" and "Summary of
Agreement."
2. Redomiciliation of SERC in California. The SERC Board of Directors has
determined that, for the purpose of corporate governance, it is in the best
interest of SERC to reincorporate SERC pursuant to the laws of the State of
California. California is the corporate domicile of Telegen. The intention of
the Board once shareholder approval is received, is to merge SERC with and into
SERC California. Shareholders will have the option of returning their stock
certificates for reissuance of the same number of shares, with the same par
value and rights as they currently have, or in the alternative, will be able to
keep their share certificates knowing that upon transfer, new certificates will
be issued listing California as the state of incorporation. The number of shares
that will be authorized for issuance, issued and outstanding will be identical
before and after the completion of the redomiciliation of SERC.
Introduction
The Board of Directors believes that the best interests of SERC and its
shareholders will be served by changing the state of incorporation of SERC from
Colorado to California (the "Reincorporation Proposal" or the "Proposed
Reincorporation").
Under the circumstances of the Agreement, SERC may exchange its shares for
all of the issued and outstanding shares of Telegen without a shareholder vote
and without dissenter's rights or rights of appraisal if it is being acquired by
a California corporation. In preparation for the completion of the Agreement
with Telegen, SERC agreed to reincorporate into the State of California in an
effort to eliminate the requirement and therefore reduce the costs and expenses
of completing the Agreement. Management had previously agreed to reincorporate
into California subsequent to the merger and since SERC determined to deliver an
Information Statement-Prospectus, it elected to include the Reincorporation
Proposal with this document.
The proposed California certificate of incorporation and bylaws are
substantially similar to those currently in effect in Colorado, with the
exception that cumulative voting (permitted but never to date exercised by
SERC's shareholders) and par value will be eliminated. The Reincorporation
Proposal is not being proposed in order to prevent an unsolicited takeover
attempt, nor is it in response to any present attempt known to the Board of
Directors to acquire control of the Company, obtain representation on the Board
of Directors or take significant action that affects the Company. Throughout the
Information Statement, the term "SERC Colorado" refers to the existing Colorado
corporation and the term "SERC California" refers to the new proposed California
corporation, a wholly-owned subsidiary of SERC Colorado, which is the proposed
successor to SERC Colorado.
The Reincorporation Proposal will be effected by merging SERC Colorado into
SERC California (the "Reincorporation Merger"). Upon completion of the Merger,
SERC Colorado will cease to exist and SERC California will continue to operate
the business of the Company under the name SERC, Inc. Pursuant to the Agreement
and Plan of Merger between SERC California and SERC Colorado each outstanding
share of SERC Colorado Common Stock, $.50 par value, will automatically be
converted into one share of SERC California Common Stock, no par value. IT IS
NOT NECESSARY FOR SHAREHOLDERS TO EXCHANGE THEIR EXISTING STOCK CERTIFICATES FOR
STOCK CERTIFICATES OF SERC CALIFORNIA.
Upon the date on which the Reincorporation Merger is effective, SERC
California will also assume and continue the outstanding stock warrants of SERC
Colorado. Each outstanding and unexercised warrant or other right to purchase
shares of SERC Colorado Common Stock will become an warrant or right to purchase
the same number of shares of SERC California Common Stock on the same terms and
conditions and at the same exercise price applicable to any such SERC Colorado
option or stock purchase right at the Effective Date.
The Proposed Reincorporation has been unanimously approved by SERC
Colorado's Board of Directors. It is anticipated that the effective date of the
Reincorporation Merger will be as soon as reasonably practicable following the
Special Meeting of Shareholders where formal shareholder approval is assured.
However, pursuant to the reincorporation merger agreement, the Reincorporation
Merger may be abandoned or the merger agreement may be amended by the Board of
Directors (except that certain principal terms may not be amended without
shareholder approval) either before or after shareholder approval has been
obtained and prior to the Effective Date of the Proposed Reincorporation if, in
the opinion of the Board of Directors of either company, circumstances arise
that make it inadvisable to proceed. Such would be the case if the Agreement to
acquire Telegen is terminated or abandoned by any party thereto.
Shareholders of SERC Colorado will have no dissenter's rights of appraisal
with respect to the Reincorporation Proposal. The discussion set forth below is
qualified in its entirety by reference to the Reincorporation Merger Agreement,
the Certificate of Incorporation and the Bylaws of SERC California, copies of
which may be obtained from SERC free of charge upon request.
Vote Required for the Reincorporation Proposal
Approval of the Reincorporation Proposal, which will also constitute
approval of the (i) Merger Agreement, the Certificate of Incorporation and the
Bylaws of SERC California, and (ii) the assumption of SERC Colorado's
outstanding stock options by SERC California, will require the affirmative vote
of the holders of a majority of the outstanding shares of SERC Colorado Common
Stock. Since Management has agreed to vote in favor of the Reincorporation
Proposal passage is assured.
Principal Reasons for the Proposed Reincorporation
Based on the above, management of SERC and Telegen determined that an
effort to cut back on the substantial costs of a shareholder meeting and the
additional potential expense relating to dissenter's and appraisal rights, it
was in the best interest of the parties to the agreement to accomplish the
reincorporation of SERC prior to the closing of the Telegen Acquisition.
This reincorporation is a condition precedent to the completion of the
agreement as amended. All agreements that are in effect by and between SERC and
Telegen at or prior to the effective date of the reincorporation will become the
obligations of SERC California. The Proposed Reincorporation will not result in
any change in the name, business, management, fiscal year, assets or liabilities
(except to the extent of legal and other costs of affecting the Reincorporation)
or location of the principal facilities of SERC. The officers and directors of
SERC Colorado prior to the Reincorporation will become the officers and
directors of SERC California. All employee agreements and compensation
agreements of SERC Colorado will be assumed and continued by SERC California.
All stock options, warrants or other rights to acquire common stock of SERC
Colorado will automatically be converted into an option or right to purchase the
same number of shares of SERC California common stock at the same price per
share on the same terms and subject to the same conditions.
The Charters and Bylaws of SERC Colorado and SERC California
The provisions of the SERC Colorado Articles of Incorporation and Bylaws
are substantially similar to those of the SERC California Articles of
Incorporation and Bylaws in all respects except that the SERC California
Articles, as a requirement of California law, require that shareholders be
permitted to vote their shares cumulatively under certain circumstances relating
to the election of the Board of Directors. (For a detailed discussion of
cumulative voting rights in California, see "Significant Differences Between the
Corporation Laws of Colorado and California".)
The Articles of Incorporation of SERC Colorado currently authorize the
company to issue up to 100,000,000 shares of common stock, $.50 par value, and
25,000,000 shares of no par value Series A preferred stock. The Certificate of
Incorporation of SERC California provides for the same capital structure except
there is no par value for the Common Shares. The Board of Directors has the
authority under both Colorado and California law to determine the powers,
preferences and rights and the qualifications, limitations or restrictions of
the authorized and unissued Series A preferred stock. Thus effectively the Board
of Directors without shareholder approval could authorize the issuance of a
class of preferred stock under either the laws of Colorado or California which
could have the effect of delaying or preventing a change in control of the
company or of modifying the rights of holders of the company's issued and
outstanding common stock. The Board of Directors could also utilize such shares
for further financings, possible acquisitions or other uses.
Compliance with Colorado and California Law
Following the Special Meeting of Shareholders, SERC will submit the Merger
Agreement to the offices of the Colorado Secretary of State and to the office of
the California Secretary of State for filing. The redomiciliation will be
effective upon the filings being accepted by the Secretaries of State.
Significant Differences Between the Corporation Laws of Colorado and California
The corporation laws of Colorado and California differ in many respects.
Although all the differences are not set forth in this Information
Statement-Prospectus, certain provisions which could materially affect the
rights of shareholders, are discussed below.
Removal of Directors
The corporation may remove directors, with or without cause, with the
approval of a majority of the outstanding shares entitled to vote. However, no
director may be removed if the number of votes cast against such removal would
be sufficient to elect the director. Under Colorado law, a director of a
corporation that does not have a staggered board of directors or cumulative
voting may be removed with or without cause with the approval of a majority of
the outstanding shares entitled to vote at an election of directors. In the case
of a Colorado corporation having cumulative voting, if less than the entire
board is to be removed, a director may not be removed without cause if the
number of shares voted against such removal would be sufficient to elect the
director under cumulative voting. Under California law, any director or the
entire board of directors may be removed, with or without cause, with the
approval of a majority of the outstanding shares entitled to vote; however, no
individual director may be removed (unless the entire board is removed) if the
number of votes cast against such removal would be sufficient to elect the
director under cumulative voting.
Classified Board of Directors
A classified or staggered (term in Colorado) board is one on which a
certain number, but not all, of the directors are elected on a rotating basis
each year. This method of electing directors makes changes in the composition of
the board of directors more difficult, and thus a potential change in control of
a corporation a lengthier and more difficult process. The SERC Colorado
Certificate of Incorporation and Bylaws do not provide for a staggered board and
SERC Colorado presently does not intend to establish a staggered board. The
establishment of a classified board following the Proposed Reincorporation would
require the approval of the stockholders of SERC Colorado. Pursuant to
legislation which became effective on January 1, 1990, California law now
permits certain qualifying corporations to provide for a classified board of
directors by adopting amendments to their articles of incorporation or bylaws,
which amendments must be approved by the shareholders. Although SERC California
qualifies to adopt a classified board of directors, its Board of Directors has
no present intention of doing so. Colorado law permits, but does not require, a
staggered board of directors, pursuant to which the directors can be divided
into as many as three classes with staggered terms of office, with only one
class of directors standing for election each year.
Indemnification and Limitation of Liability
California and Colorado have similar laws respecting indemnification by a
corporation of its officers, directors, employees and other agents. The laws of
both states also permit, with certain exceptions, a corporation to adopt a
provision in its articles of incorporation or certificate of incorporation, as
the case may be, eliminating the liability of a director to the corporation or
its shareholders for monetary damages for breach of the director's fiduciary
duty. There are nonetheless certain differences between the laws of the two
states respecting indemnification and limitation of liability.
The Articles of Incorporation of SERC California eliminate the liability of
directors to the corporation to the fullest extent permissible under California
law. California law does not permit the elimination of monetary liability where
such liability is based on: (a) intentional misconduct or knowing and culpable
violation of law; (b) acts or omissions that a director believes to be contrary
to the best interests of the corporation or its shareholders, or that involve
the absence of good faith on the part of the director; (c) receipt of an
improper personal benefit; (d) acts or omissions that show reckless disregard
for the director's duty to the corporation or its shareholders, where the
director in the ordinary course of performing a director's duties should be
aware of a risk of serious injury to the corporation or its shareholders; (e)
acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the corporation and its
shareholders; (f) interested transactions between the corporation and a director
in which a director has a material financial interest; and (g) liability for
improper distributions, loans or guarantees.
While Colorado law provides for the elimination of director liability, the
Certificate of Incorporation of SERC Colorado does not eliminate the liability
of directors to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director.
Colorado law generally permits indemnification of director expenses,
including attorney's fees, actually and reasonably incurred in the defense or
settlement of a derivative or third-party action, provided there is a
determination by a majority vote of a disinterested quorum of the directors, by
independent legal counsel or by a majority vote of a quorum of the stockholders
that the person seeking indemnification acted in good faith and in a manner
reasonably believed to be in the best interests of the corporation. Without
court approval, however, no indemnification may be made in respect of any
derivative action in which such person is adjudged liable for negligence or
misconduct in the performance of his or her duty to the corporation. Colorado
law requires indemnification of director expenses when the individual being
indemnified has successfully defended any action, claim, issue, or matter
therein, on the merits or otherwise.
California law permits indemnification of expenses incurred in derivative
or third-party actions, except that with respect to derivative actions (a) no
indemnification may be made when a person is adjudged liable to the corporation
in the performance of that person's duty to the corporation and its shareholders
unless a court determines such person is entitled to indemnify for expenses, and
then such indemnification may be made only to the extent that such court shall
determine, and (b) no indemnification may be made without court approval in
respect of amounts paid or expenses incurred in settling or otherwise disposing
of a threatened or pending action or amounts incurred in defending a pending
action that is settled or otherwise disposed of without court approval.
California law requires indemnification when the individual has defended
successfully the action on the merits (as opposed to Colorado law, which
requires indemnification relating to a successful defense on the merits or
otherwise).
Expenses incurred by an officer or director in defending an action may be
paid in advance, under Colorado law and California law, if such director or
officer undertakes to repay such amounts if it is ultimately determined that he
or she is not entitled to indemnification. In addition, the laws of both states
authorize a corporation's purchase of indemnity insurance for the benefit of its
officers, directors, employees and agents whether or not the corporation would
have the power to indemnify against the liability covered by the policy.
California law permits a California corporation to provide rights to
indemnification beyond those provided therein to the extent such additional
indemnification is authorized in the corporation's articles of incorporation.
Thus, if so authorized, rights to indemnification may be provided pursuant to
agreements or bylaw provisions which make mandatory the permissive
indemnification provided by California law. Under California law, there are two
limitations on such additional rights to indemnification; (i) such
indemnification is not permitted for acts, omissions or transactions from which
a director of a California corporation may not be relieved of personal liability
as described above; and (ii) such indemnification is not permitted in
circumstances where California law expressly prohibits indemnification, as
described above. SERC California's Articles of Incorporation permit
indemnification beyond that expressly mandated by the California Corporations
Code and limits director monetary liability to the extent permitted by
California law. SERC California plans to adopt the indemnification agreements
that are in force with the Telegen officers and directors.
A provision of Colorado law states that, except with regard to directors,
the indemnifications provided by statute shall not be deemed exclusive of any
other rights under any bylaw, agreement, vote of stockholders or directors or
otherwise. SERC Colorado has no additional rights of indemnification in place
except as provided by Colorado law.
Inspection of Shareholder List
Both California and Colorado law allow any shareholder to inspect the
shareholder list for a purpose reasonably related to such person's interests as
a shareholder. California law provides, in addition, for an absolute right to
inspect and copy the corporation's shareholder list by persons holding an
aggregate of five percent (5%) or more of a corporation's voting shares, or
shareholders holding an aggregate of one percent (1%) or more of such shares who
have filed a Schedule 14B under the revised proxy rules. Under California law,
such absolute inspection rights also apply to a corporation formed under the
laws of any other state if its principal executive offices are in California or
if it customarily holds meetings of its board in California. Colorado law
contains no provisions comparable to the absolute right of inspection provided
by California law to certain shareholders and limits the inspection rights to
periods after notice of a meeting through and including during the meeting.
Dividends and Repurchases of Shares
Both Colorado and California law dispense with the concepts of par value of
shares as well as statutory definitions of capital, surplus and the like.
Colorado law permits a corporation to declare and pay dividends unless,
after giving it effect: (a) the corporation would not be able to pay its debts
as they become due in the usual course of business; or (b) the corporation's
total assets would be less than the sum of its total liabilities plus (unless
the articles of incorporation permit otherwise) the amount that would be needed,
if the corporation were to be dissolved at the time of the distribution, to
satisfy the preferential rights upon dissolution of shareholders whose
preferential rights are superior to those receiving the distribution.
Under California law, a corporation may not make any distribution
(including dividends, whether in cash or other property, and repurchase of its
shares, other than repurchase of its shares issued under employee stock plans
contemplated by Section 408 of the California Corporations Code) unless either
(i) the corporation's retained earnings immediately prior to the proposed
distribution equal or exceed the amount of the proposed distribution, or (ii)
immediately after giving effect to such distribution, the corporation's assets
(exclusive of goodwill, capitalized research and development expenses and
deferred charges) would be at least equal to 1 1/4 times its liabilities (not
including deferred taxes, deferred income and other deferred credits), and the
corporation's current assets would be at least equal to its current liabilities
(or 1 1/4 times its current liabilities if the average pre-tax and pre-interest
expense earnings for the preceding two fiscal years were less than the average
interest expenses for such years). Such tests are applied to California
corporations on a consolidated basis.
To date, the Company has not paid any cash dividends.
Shareholder Voting
Both California and Colorado law generally require that a majority of the
shareholders of both acquiring and target corporations approve statutory
mergers. Colorado law does not require a stockholder vote of the surviving
corporation in a merger (unless the corporation provides otherwise in its
certificate of incorporation) if (a) the merger agreement does not amend the
existing certificate of incorporation, (b) each share of the stock of the
surviving corporations outstanding immediately before the effective date of the
merger is an identical outstanding of treasury share after the merger, and (c)
either no shares of common stock of the surviving corporation and no shares,
securities or obligations convertible into such stock are to be issued or
delivered under the plan of merger, or the authorized unissued shares or the
treasury shares of common stock of the surviving corporation to be issued or
delivered under the plan of merger plus those initially issuable upon conversion
of any other shares, securities or obligations to be issued or delivered under
such plan do not exceed twenty percent (20%) of the shares of common stock of
such constituent corporation outstanding immediately prior to the effective date
of the merger. California law contains a similar exception to its voting
requirements for reorganizations where shareholders of the corporation itself,
or both, immediately prior to the reorganization will own immediately after the
reorganization equity securities constituting more than five sixths of the
voting power of the surviving or acquiring corporation or its parent entity.
Both California law and Colorado law also require that a sale of all or
substantially all of the assets of a corporation be approved by a majority of
the outstanding voting shares of the corporation transferring such assets.
With certain exceptions, California law also requires that mergers,
reorganizations, certain sales of assets, and similar transactions be approved
by a majority vote of each class of shares outstanding. In contrast, Colorado
law generally does not require class voting, except in certain transactions
involving an amendment to the certificate of incorporation that adversely
affects a specific class of shares or where the class of securities designates
such a right. As a result, shareholder approval of such transactions may be
easier to obtain under Colorado law for companies which have more than one class
of shares outstanding.
California law also requires that holders of nonredeemable common stock
receive nonredeemable common stock in a merger of the corporation with the
holder of more than fifty percent (50%) but less than ninety percent (90%) of
such common stock or its affiliate unless all of the holders of such common
stock consent to the transaction. This provision of California law may have the
affect of making a "cash-out" merger by a majority shareholder more difficult to
accomplish. Colorado law does not parallel California law in this respect.
California law provides that, except in certain circumstances, when a
tender offer or a proposal for a reorganization or for a sale of assets is made
by an interested party (generally a controlling or managing person of the target
corporation), an affirmative opinion in writing as to the fairness of the
consideration to be paid to the shareholders must be delivered to shareholders.
This fairness opinion requirement does not apply to a corporation that does not
have shares held of record by at least 100 persons, or to a transaction that has
been qualified under California state securities laws. Furthermore, if a tender
of shares or vote is sought pursuant to an interested party's proposal and a
later proposal is made by another party at least ten days prior to the date of
the acceptance of the interested party proposal, the shareholders must be
informed of the later offer and be afforded a reasonable opportunity to withdraw
any vote, consent or proxy, or to withdraw any tendered shares. Colorado law has
no comparable provision.
Interested Director Transactions
Under both California and Colorado law, certain contracts or transactions
in which one or more of a corporation's directors has an interest are not void
or voidable because of such interest provided that certain conditions, such as
obtaining the required approval and fulfilling the requirements of good faith
and full disclosure, are met. With certain exceptions, the conditions are
similar under California and Colorado law. Under California and Colorado law,
(a) either the shareholders or the board of directors must approve any such
contract or transaction after full disclosure of the material facts, and, in the
case of board approval, the contract or transaction must also be "just and
reasonable" (in California) or "fair" (in Colorado) to the corporation, or (b)
the contract or transaction must have been just and reasonable or fair as to the
corporation at the time it was approved. In the latter case, California law
explicitly places the burden of proof on the interested director. Under
California law, if shareholder approval is sought, the interested director is
not entitled to vote his shares at a shareholder meeting with respect to any
action regarding such contract or transaction. If board approval is sought, the
contract or transaction must be approved by a majority vote of a quorum of the
directors, without counting the vote of any interested directors (except that
interested directors may be counted for purposes of establishing a quorum).
Therefore, certain transactions that the Board of Directors of SERC California
might not be able to approve because of the number of interested directors,
could be approved by a majority of the disinterested directors of Colorado,
although less than a majority of a quorum. The Company is not aware of any plans
to propose any transaction involving directors of the Company that could not be
so approved under California law but could be so approved under Colorado law.
Shareholder Derivative Suits
California law provides that a shareholder bringing a derivative action on
behalf of a corporation need not have been a shareholder at the time of the
transaction in question, provided that certain tests are met. Under Colorado
law, a stockholder may bring a derivative action on behalf of the corporation
only if the stockholder was a stockholder of the corporation at the time of the
transaction in question or if his or her stock thereafter devolved upon him or
her by operation of law. Both Colorado and California law also provide that the
corporation or the defendant in a derivative suit may make a motion to the court
for an order requiring the plaintiff shareholder to furnish a security bond.
Appraisal Rights
Under both California and Colorado law, a shareholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to appraisal/dissenters' rights pursuant to which
such shareholder may receive cash in the amount of the fair market value of his
or her shares in lieu of the consideration he or she would otherwise receive in
the transaction. Under Colorado law, such fair market value is determined
exclusive of any element of value arising from the accomplishment or expectation
of the merger or consolidation and such appraisal rights are not available to
stockholders of a corporation surviving a merger if no vote of the stockholders
of the surviving corporation is required to approve the merger or share exchange
under certain provisions of Colorado law. Appraisal or dissenters' rights are
not available to shareholders of SERC Colorado with respect to the
Reincorporation Proposal. California law generally affords appraisal rights in
sale or asset reorganizations.
The limitations on the availability of appraisal rights under California
law are different from those under Colorado law. Shareholders of a California
corporation whose shares are listed on a national securities exchange or on a
list of over-the-counter margin stocks issued by the Board of Governors of the
Federal Reserve System generally do not have such appraisal rights unless the
holders of at least five percent (5%) of the class of outstanding shares claim
the right of the corporation or any law restricts the transfer of such shares.
Appraisal rights are also unavailable if the shareholders of a corporation or
the corporation itself, or both, immediately prior to the reorganization will
own immediately after the reorganization equity securities constituting more
than five-sixths of the voting power of the surviving or acquiring corporation
or its parent entity.
Dissolution
Under California law, shareholders holding fifty percent (50%) or more of
the total voting power may authorize a corporation's dissolution, with or
without the approval of the corporation's board of directors, and this right may
not be modified by the articles of incorporation. Under Colorado law, if the
dissolution is initially approved by the board of directors, it may be approved
by a simple majority of the outstanding shares of the corporation's stock
entitled to vote. In the event of such a board-initiated dissolution, Colorado
law allows a Colorado corporation to include in its certificate of incorporation
a supermajority (greater than a simple majority) voting requirement in
connection with dissolutions. Under Colorado law, shareholders may only initiate
dissolution by way of a judicial proceeding.
An affirmative vote will give SERC management the authority to take all
action deemed necessary to change the domicile of SERC.
3. Ratification of 1 for 7.25 Reverse Split of Common Shares. Pursuant to
the terms of the Agreement, the SERC Board of Directors adopted on January 5,
1996 a resolution, subject to completion of Acquisition described above, to
reverse split the issued and outstanding shares of the SERC's $.50 par value
common stock one share for seven and one-fourth shares (1 for 7.25). Proposed
for approval by shareholder vote is such reverse split. There will be no
adjustment to the par value.
The SERC Board believes the reverse split is in the best interests of SERC
and its shareholders in that it will adjust the number of shares of SERC's
common stock outstanding in a manner conducive to effectuating the Acquisition
described above.
The reverse split will result in one share of common stock, par value $.50,
being outstanding for each seven and one-fourth issued and outstanding shares of
common stock, par value $.50. In lieu of the issuance of any resulting
fractional shares, the number of shares owned by a shareholder will be rounded
up to the next whole number. SERC is presently authorized to issue 100,000,000
shares of common stock, of which 1,427,596 shares were issued and outstanding as
of July 31, 1996.
Each existing certificate representing shares of SERC's $.50 par value
common stock will, until surrendered or exchanged as described below, be deemed,
for all corporate purposes, to evidence ownership of the whole number of shares
of SERC's common stock as appropriately adjusted for the reverse split and if
transferred or sold, will automatically be reissued in the transferee's name in
the new post-split number of shares. Further, any rights to acquire SERC common
stock will be subject to automatic adjustment to reflect the one-for-seven and
one-fourth (1 for 7.25) reverse split of the common shares.
Once the Acquisition discussed above is completed, the conversion of shares
of SERC's common stock will occur immediately and without any action on the part
of shareholders of the Company and without regard to the date or dates
certificates representing shares of SERC's $.50 par value common stock are, at
the option of shareholders, physically surrendered for transfer or exchange.
Shareholders need not contact SERC or its transfer agent as a result of the
reverse split. If requested by a shareholder to issue a new certificate, SERC's
transfer agent, United Stock Transfer Inc. (the "Transfer Agent"), will effect
the exchange of certificates. The cost of the exchange will be borne by the
shareholder seeking the reissued certificate. The address of United Stock
Transfer Inc. is 13275 East Fremont Place, Suite 302, Englewood, Colorado
80112-3910.
4. Election of Directors. Pursuant to the terms of the Agreement and in
connection with the consummation of the Acquisition of Telegen, the six current
Telegen directors are to be elected to fill the vacancies resulting from the
resignations of the current SERC directors.
The SERC Board of Directors believes that election of the six current
Telegen directors to the SERC Board of Directors to fill the vacancies resulting
from the current SERC directors, subject to the consummation of the Acquisition,
is in the best interests of SERC and its shareholders in that it will continue
the management associated with the business to be acquired pursuant to the
Acquisition and carried on subsequent to closing. See "TELEGEN - Management of
Telegen."
5. Approval of Name Change. The full text of Articles of Amendment to the
Articles of Incorporation described in proposals 2 and 5 is set forth as an
exhibit hereto and the description of such is qualified in its entirety by
reference to the exhibit.
The Board of Directors of SERC has adopted, subject to shareholder
approval, a resolution to amend Article FIRST of the Articles of Incorporation
to change the name of SERC, subject to completion of the Acquisition, to Telegen
Corporation. The Board of Directors believes that the amendment is in the best
interests of SERC and its shareholders in that it will continue the identity
associated with the business to be acquired pursuant to the Acquisition and
carried on subsequent to closing. The amendment will in actuality affect only
SERC California.
Article FIRST is presently set forth in the Articles of Incorporation. The
resolution amending Article FIRST is set forth as an exhibit to this Information
Statement-Prospectus.
Accordingly, the following resolution will be offered at the meeting:
RESOLVED, that Article FIRST of the Articles of Incorporation of SERC, Inc.
be amended with respect to the name of the Company and restated to read
substantially as shown in the Articles of Amendment set forth as an exhibit
attached to this Information Statement accompanying the Notice of the September
27, 1996 Special Meeting of the Shareholders of Solar Energy Research Corp. and
that the Board of Directors be authorized to provide for the filing of such
Articles of Amendment with the California Secretary of State to give effect to
the amendments authorized at the Special Meeting.
Other Business. As of the date of this Information Statement-Prospectus,
the SERC Board of Directors does not know of any matters other than the matters
described above that are expected to be presented for consideration at the SERC
Special Meeting of Shareholders. Proposals of security holders need to have been
received by SERC within a reasonable time prior to the date of this Information
Statement-Prospectus to have been considered for inclusion herein and
presentation at the Special Meeting of SERC shareholders.
Meeting Procedures
The minute book, Bylaws and Articles of Incorporation will be open to
inspection before, during, and after the meeting. SERC's auditor and transfer
agent will not send representatives to the meeting. The meeting will be
conducted by SERC's management with assistance and participation of shareholders
in attendance, if any. Tally of voting on proposals will be done by management
and witnessed by an inspector selected at random from those in attendance and
duly sworn to oath by a notary public in attendance.
The meeting shall be called to order by the Chairman and the Secretary
shall read the Notice. The Secretary will present the certified shareholder list
as of the record date. The affidavit of mailing of Notice shall be displayed.
The shares present will be polled by management and witnessed by the inspector
to determine a quorum. If a quorum is present, the meeting will be declared
lawfully and properly convened.
The Chairman will present the proposals and after discussion or questions,
if any, a resolution will be entertained, seconded and a vote taken on each. The
inspector will tally votes for and against each proposal and the Chairman will
announce the results. SERC will retain the inspector's worksheets for each vote
and file any approved Articles of Amendment to the Articles of Incorporation and
the Agreement and Plan of Merger between SERC Colorado and SERC California with
the California Secretary of State and with the Colorado Secretary of State.
Voting Rights and Votes Required
Approval of the Agreement, the Reincorporation Proposal and the Amendment
to the Articles of Incorporation to change the name of SERC California to
Telegen Corporation will require the affirmative vote of the majority of shares
of SERC common stock outstanding as of the record date, or at a minimum 713,799
shares. The election of the six current Telegen directors to the SERC Board of
Directors and approval of the one-for-seven and one-fourth reverse split of the
shares of SERC California common stock issued and outstanding will require the
affirmative vote of the majority of a quorum of SERC common stock represented at
the meeting.
Abstentions and shares held by a broker in a "street name" will have the
same effect as the votes cast in opposition to the Approval of the Agreement,
the Reincorporation Proposal and the Amendment to the Articles of Incorporation
to change the name of SERC California to Telegen Corporation. Abstentions and
shares held by a broker in a "street name" that are not voted in the election of
directors and the one-for-seven and one-fourth reverse split of the shares of
SERC California common stock will not be included in determining the number of
votes cast.
Only holders of record of SERC common stock on the close of business on
July 31, 1996 are entitled to receive notice and to vote at the SERC Special
Meeting. As of July 31, 1996, there were 1,427,596 shares of SERC common stock
outstanding and entitled to vote with each such share entitled to one (1) vote.
James B. Wiegand, a principal shareholder of SERC and a member of SERC
management owns 53.7% of the outstanding shares of SERC common stock and will
vote such shares in favor of each of the above proposals. Therefore, as of the
date of this Information Statement-Prospectus, approval of each of the proposals
by the required affirmative vote is assured.
Stock Ownership of Directors, Executive Officers and their Affiliates
As of July 31, 1996, the directors and executive officers of SERC and their
respective affiliates owned 771,772 shares of SERC common stock, representing
approximately 54.1% of the outstanding shares of SERC common stock. For a
schedule of the security ownership of certain beneficial owners and management
of SERC, which includes outstanding rights to acquire SERC common stock, see
"SERC - Security Ownership of Certain Beneficial Owners and Management."
Executive Compensation
SERC's directors receive no compensation for their services. SERC has no
retirement, pension, profit sharing, insurance or medical reimbursements plans
covering its officers or directors. Further, no compensatory plan or arrangement
exists between SERC and any executive officer, except as discussed herein.
During 1995, the SERC Board of Directors awarded the President of SERC
52,500 shares of SERC common stock valued at $26,250, as compensation. With the
exception of $8,750 paid in cash to SERC's President during 1995, no cash
compensation has been paid or accrued with respect to any SERC officer or
director since 1983. All SERC officers and directors are reimbursed by SERC for
actual out-of-pocket expenses incurred on behalf of SERC.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h)
Other
Name Annual Restricted Securities All Other
and Compen- Stock Underlying LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($) ($) (1) ($) SAR's(#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James B.
Wiegand,
President 1995 $8,750 $ - $ 26,250 $ - - $ - $ -
1994 $ - $ - $ 35,000 $ - - $ - $ -
1993 $ - $ - $ 41,500 $ - - $ - $ -
</TABLE>
(1) During 1995, 1994 and 1993, the SERC Board of Directors awarded Mr. Wiegand
52,500 shares, 70,000 shares and 83,000 shares, respectively, of SERC
common stock valued at $26,250, $35,000 and $41,500, respectively, which
represented the par value of the shares granted at $0.50 per share. In
1993, the SERC Board of Directors granted to Mr. Wiegand warrants to
acquire SERC common stock at the then designated value of SERC common stock
of $0.50 per share.
All noncash compensation is reported in the table above as valued by SERC's
Board of Directors and was paid in SERC common stock at the rate of one share
for each $0.50 of compensation. Warrants to acquire SERC common stock for $0.50
per share were valued by SERC's Board of Directors at zero at the time of issue.
For executive compensation information with respect to the current
directors and executive officers of Telegen who, pursuant to the terms of the
Agreement, will serve as directors and executive officers of SERC California,
the acquiring corporation, upon consummation of the Acquisition, see "TELEGEN -
Management of Telegen."
<PAGE>
SERC
Business of SERC
Introduction
SERC, which was incorporated in Colorado on December 21, 1973, was formerly
engaged in the business of designing, marketing and servicing solar heating
systems. In December 1981, SERC reduced its solar business. SERC discontinued
its solar business in 1983 due to continued losses. The solar industry segment
serviced by SERC generally closed in 1985 with the termination of Federal Solar
Tax Credits. SERC has not provided service to any solar customers since 1983 and
is presently a development stage corporation. SERC's primary activity from 1985
through 1992 was the settling of various judgments relating to the discontinued
solar business. Since that time, SERC, which is subject to the informational
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), has been actively searching for an operating business or
businesses to acquire. SERC's corporate offices are located at 10075 East County
Line Road, Longmont, Colorado 80501; (303) 772-3316. SERC owns all of the
capital stock of SERC California and Telegen Acquisition Corporation ("TAC").
SERC California and TAC were organized by SERC for the purpose of effecting the
Acquisition by a redomiciliation of SERC as a California corporation through a
merger of SERC with and into SERC California and the acquisition by SERC
California of all of the outstanding capital stock of Telegen through a merger
of TAC with and into Telegen with Telegen thereby becoming a wholly owned
subsidiary of SERC California (the "Acquisition").
On January 7, 1994, the shareholders of SERC met and approved a one
share-for-fifty shares reverse split of SERC's common stock, a simultaneous
increase of the par value of the common stock from $.01 to $.50 per share and
other related matters. This Information Statement-Prospectus and the
accompanying financial statements are stated to give effect to this reverse
split and the change in par value of the common stock. Accordingly, reference
herein to SERC's common shares refers to the $.50 par value common stock of SERC
in post-split amounts.
History of SERC
SERC was originally organized to engage in the business of designing,
marketing and servicing solar heating systems. From 1973 to 1983, SERC's
operations consisted of assembling, manufacturing, marketing and installing
solar heating systems including collectors, heat exchangers, controls and the
packaging of these with purchased special components manufactured by others such
as heat pumps, tanks, pipes, plumbing items and related hardware products. In
November 1975, SERC sold 100,000 shares of its common stock in an initial public
offering through an underwriter. At that time, SERC became subject to the
informational reporting requirements of the Exchange Act. SERC ceased filing
informational reports with the Securities and Exchange Commission ("SEC") in
1979 after a registered rights offering to shareholders failed to yield adequate
funds to expand SERC's solar business or to continue incurring the expense of
public reporting. In December 1981, SERC reduced its solar business. SERC
discontinued its solar business in 1983 due to continued losses. The solar
industry segment serviced by SERC generally closed in 1985 with termination of
Federal Solar Tax Credits. SERC has not provided service to any solar customers
since 1983 and is presently a development stage corporation. SERC's primary
activity from 1985 through 1992 was the settling of various judgments relating
to the discontinued solar business. SERC resumed filing informational reports
with the SEC in 1992. SERC has never entered into bankruptcy, a receivership or
any similar proceeding.
In November 1992, SERC reorganized and recommenced operations in an effort
to located and acquire a privately owned operating business desiring to obtain
greater access to the capital markets by having securities registered under the
Securities Act through a merger with an entity already subject to the
informational reporting requirements of the Exchange Act.
In July of 1993, SERC filed a Registration Statement on Form 10 with the
SEC. Registration of SERC's securities under the Exchange Act became effective
in September 1993. Thereafter pursuant to SEC rules, SERC became subject to
reporting requirements under the Exchange Act. SERC's first report to the SEC
under the Exchange Act was Form 10-QSB filed in September 1993. Since that time
SERC has remained current in all reporting obligations to the SEC and the State
of Colorado.
Present Activities of SERC
SERC, now a development stage corporation subject to the informational
reporting requirements of the Exchange Act, has recently been conducting a
search for a merger/acquisition with a privately owned operating business that,
when acquired, will continue operations as part of SERC. As a result of such
search, SERC entered into the Agreement with respect to the Acquisition of
Telegen to which this Information Statement-Prospectus relates. SERC, in light
of its present Agreement with Telegen Corporation, believes it has completed its
search to identify its most suitable candidate. In compliance with the terms of
the Agreement, SERC has terminated its advertisements soliciting the interest of
other potential target companies. See "The Acquisition."
SERC has retained the services of counsel and an accounting firm in order
to properly effect the Acquisition. SERC has incurred significant legal fees and
accounting costs to complete the Acquisition. Management has completed certain
private placements of its common stock to accredited investors to provide a cash
reserve to pay certain costs to complete the Telegen Acquisition. Management
believes that cash presently available for certain merger costs will increase
the likelihood of the consummation of a merger by SERC, however there is no
assurance even given sufficient available cash, that the Acquisition under terms
favorable to SERC will be consummated. The ongoing primary goals of management
are to increase the value and liquidity of SERC's common stock.
In 1995, SERC issued 190,000 common shares to accredited investors for
$95,000 cash, and 75,000 common shares to related parties for compensation and
other expenses. During the six months ended June 30, 1996, SERC issued (i)
10,000 common shares in consideration of $5,000 in legal fees associated with
the Telegen Acquisition and (ii) 143,746 common shares to accredited investors
in exchange for $71,873 in cash.
Competition
SERC is an insignificant participant among the firms which engage in
mergers with and acquisitions of privately financed entities. There are many
established venture capital and financial concerns which have significantly
greater financial and personnel resources and technical expertise than SERC. The
combined financial resources and management availability of SERC and SERC's
affiliate are limited, under the terms of the Agreement, Telegen may
unilaterally terminate the Agreement upon the failure of SERC to cure a breach
of SERC's representations and warranties or a failure to close the Acquisition
on a timely basis. If Telegen terminates the Agreement for any other reason,
Telegen must provide for the reimbursement to SERC of all expenses incurred by
SERC and advanced by SERC to Telegen to assist Telegen in the completion of this
Agreement through the date of termination, in an amount not to exceed $172,000.
Regulation and Taxation
SERC could be subject to regulation under the Investment Company Act of
1940 in the event SERC obtains and continues to hold a minority interest in a
number of entities. However, management intends to seek at most one merger or
acquisition and management's plan of operation is based upon SERC obtaining a
controlling interest in any merger or acquisition target company and,
accordingly, SERC may be required to discontinue any prospective merger or
acquisition of any company in which a controlling interest will not be obtained.
Any securities which SERC acquires in exchange for its common stock will be
"restricted securities" within the meaning of the Securities Act. If SERC
elected to resell such securities, such sale could not proceed unless a
registration statement had been declared effective by the Securities and
Exchange Commission or an exemption from registration was available. Section
4(2) of the Securities Act, which exempts sales of securities not involving any
public offering, would in all likelihood be available since it is likely that
any such sale would be a block sale to a private investor to raise additional
capital. Although management's plan of operation does not contemplate resale of
securities acquired, in the event such a sale were necessary, SERC would be
required to comply with the provisions of the Securities Act.
While the parties have used their best efforts to structure the Acquisition
in such a manner as to minimize federal and state tax consequences to SERC and
Telegen through the Acquisition's treatment for tax purposes as a "tax-free"
reorganization under Section 368(a) of the Internal Revenue Code of 1986, as
amended, there can be no assurance that the Acquisition will result in such tax
treatment.
Properties
SERC's offices are located at 10075 East County Line Road, Longmont,
Colorado 80501 at the residence of its President on a rent free basis. SERC
utilizes at no cost computer, fax machine and other general office equipment
owned by an affiliate company which occupies adjacent facilities. Following the
completion of an acquisition these arrangements will be terminated. SERC owns no
real estate.
SERC Plan of Operation
Liquidity and Capital Resources
SERC's liquidity has been dependent on the proceeds from private placements
of its common stock. In addition, an affiliate has in the past infused capital
into SERC on an as-needed basis in exchange for shares of common stock. Under
this arrangement during 1995, SERC issued its affiliate 22,500 shares of SERC's
common stock in exchange for expenses paid on behalf of SERC.
SERC faces a lack of capital and management has limited experience; should
SERC's affiliate or SERC's president be unable to assist SERC, SERC would have
to locate capital and/or management assistance. In the past, SERC has
experienced substantial costs to achieve and maintain current reporting with the
SEC as well as significant additional costs to conduct a merger search and there
is no assurance that SERC can locate financial and management resources
sufficient to maintain timely SEC reporting or continue merger search activities
should the proposed acquisition of Telegen Corporation discussed below not be
completed. Should SERC fall behind or cease SEC reporting, the likelihood of
completing a merger will be reduced. As of December 31, 1995 and 1994, SERC had
five judgments outstanding totaling $17,997 plus accrued interest. There was no
liquidation of judgments by SERC during the current year.
In November 1995, SERC entered into an Agreement and Plan of Reorganization
(the "Agreement") with Telegen Corporation pursuant to which SERC is to acquire
all of the outstanding capital stock of Telegen in exchange for shares of SERC
common stock and shares of SERC Series A preferred stock (the "Acquisition").
Telegen is engaged in the design, development, manufacture (through contract
manufacturers) and sale (through manufacturers' representatives and private
label resellers), in Telegen communications products which provide supplementary
features to existing telephone equipment and services for customers and small
businesses. As part of the Telegen Acquisition, SERC is to execute a one
share-for-seven and one-fourth shares (1 for 7.25) reverse split of its shares
of common stock outstanding immediately prior to consummation of the Telegen
Acquisition.
SERC has advanced to Telegen and otherwise incurred certain costs and
expenses on Telegen's behalf, including Telegen's legal and accounting fees, to
assist Telegen in the completion of the Telegen Acquisition. In addition, SERC
has incurred other expenses related to the Acquisition. As of May 31, 1996, SERC
had incurred a total of approximately $172,000 for Acquisition costs and
expenses, including advances to Telegen of $40,000, which were funded by the
private placement of SERC's common stock at $.50 per share. Should Telegen
cancel the Agreement for any reason other than a failure of SERC to cure a
breach of SERC's representations and warranties under the Agreement or to
promptly close, Telegen is obligated under the Agreement to reimburse SERC
$172,000 for such costs and expenses related to the Acquisition. Under the
Agreement, Telegen is to pay the remaining costs and expenses related to
completing the Acquisition incurred subsequent to May 31, 1996, and has advanced
to SERC approximately $28,000 for SERC's remaining Acquisition costs and
expenses.
SERC is relying on its limited cash and the agreement by Telegen to pay for
SERC's remaining costs related to the Acquisition. SERC is aware of the present
operating cash flow deficit of Telegen. However, SERC believes Telegen has
obtained sufficient cash through its financing activities to meet Telegen's and
SERC's foreseeable needs with respect to completing the Acquisition.
As part of the Acquisition SERC will execute a 7.25 for 1 reverse split of
its shares. SERC plans to issue approximately 4,453,455 (post-split) shares of
common stock to acquire all of the then outstanding shares of Telegen. In
addition, SERC plans to reincorporate in California and the definitive agreement
calls for Telegen to be acquired by the California corporation.
During the six months ended June 30, 1996, SERC issued (i)
10,000 shares of its common stock in payment for $5,000 of legal fees associated
with the Telegen Acquisition and (ii) 143,746 shares of its common stock for
$71,873 in cash, which was used to pay expenses related to the Telegen
Acquisition.
Results of Operations
SERC is a development stage corporation which had no operations for the
years ended December 31, 1995 and 1994 apart from the search for a privately
owned operating business to acquire. The majority of expenses in 1995 consisted
of compensation, legal, travel and interest expense which were the primary items
making up the $81,729 net loss. This compares with a $50,777 net loss for 1994.
Substantially all of SERC's expenses were paid by an affiliate in exchange for
common stock or were in the form of compensation contributed by an officer in
exchange for common stock. SERC accrued interest expense on its five judgments
related to the discontinuation of its solar energy business of $1,556 and $1,555
in 1995 and 1994, respectively.
No operations were conducted by SERC during the six months ended June 30,
1996 apart from those related to the Telegen Acquisition. The increase in
expenses during the six months ended June 30, 1996 as compared to the six months
ended June 30, 1995 is primarily attributable to costs related to the Telegen
Acquisition.
SERC's management believes it can ultimately achieve successful operations
through a merger or acquisition. However, SERC presently faces all the risks
which are usually associated with any new business and management has only
limited experience in operating a public company. Further, there can be no
assurance that the Telegen Acquisition will be consummated under terms favorable
to SERC. SERC is a minor participant in the business of seeking mergers with and
acquisitions of small private businesses. A large number of established and well
financed entities, including venture capital firms, have merger and acquisition
activities and have greater financial resources and managerial capabilities than
SERC. Because of limited funds, SERC is at a competitive disadvantage in
identifying and concluding a transaction with a suitable domestic merger
candidate.
As of June 30, 1996, SERC had working capital of only $13,837. SERC's
limited working capital and operating losses since inception raise substantial
doubt about SERC's ability to continue as a going concern. Further, a failure of
the Acquisition to be consummated would likely have an adverse effect on SERC's
results of operations and financial condition. Accordingly, there is no
assurance that SERC can continue for any significant length of time as a going
concern on a separate entity basis should the Acquisition of Telegen not be
consummated.
The Acquisition will be treated for accounting purposes as a
recapitalization of Telegen with Telegen being the acquiror (a "reverse
acquisition"). Accordingly, the post-merger historical financial statements of
SERC will be those of Telegen.
SERC Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
SERC has not experienced a change in its independent accountants during its
three most recent fiscal years or subsequent interim period. Further, SERC has
not had any disagreements with its independent accountants on any matter of
accounting principles or practices or financial disclosure.
Security Ownership of Certain Beneficial Owners and Management
The following tabulates holdings of SERC's $.50 par value common stock, as
of the date of this Information Statement-Prospectus, held of record by all
Directors and Officers of SERC individually and as a group, and other Principal
shareholders:
Shares (including shares that the listed beneficial owner has a right
to acquire within sixty days from warrants)
Name and Address of Beneficially % Beneficial Ownership of
Beneficial Owner Owned (4, 5) Common Shares (4, 5)
Mark E. A. Wiegand (1,2) 2,822 0.2%
4800 Baseline, E102
Boulder, CO 80303
James B. Wiegand (1,2,3) 815,950 54.2%
10077 E. County Line Road
Longmont, CO 80501
Janet S. Collins (1,3) 13,000 0.9%
10077 E. County Line Road
Longmont, CO 80501
All Officers and Directors 831,772 55.9%
as a group (3 individuals)
Norrlanska Kross, Inc. (3) 130,209 9.1%
615 N. Main St., Suite 678
Longmont, CO 80501
(1) Officers and Directors
(2) Related family members
(3) James B. Wiegand is a beneficial owner of shares owned by Norrlanska
Kross, Inc. SERC is controlled by James B. Wiegand by virtue of beneficial
ownership of the 130,209 shares held by Norrlanska Kross, Inc. and direct
ownership of 685,741 shares (including 50,000 shares that Mr. Wiegand has a
right to acquire within sixty days from warrants). James B. Wiegand and Janet S.
Collins are common law husband and wife. Janet S. Collins disclaims any
beneficial ownership of shares owned by James B. Wiegand.
(4) Shares of common stock subject to warrants currently exercisable are
deemed outstanding for computing the percentage of the person holding such
warrants, but are not deemed outstanding for computing the percentage of any
other person. Thus, the sum of individuals and entities outstanding as a percent
of common stock beneficially owned may exceed 100%.
(5) As of July 31, 1996, SERC has 1,427,596 shares of common stock
outstanding. As of July 31, 1996, Mr. James B. Wiegand and Ms. Collins had the
right to acquire within sixty days under outstanding warrants 50,000 shares and
10,000 shares of SERC common stock, respectively.
<PAGE>
Market for SERC's Securities and Related Stockholder Matters
Market Information
SERC conducted an Initial Public Offering in November 1975. A market for
its securities existed from 1975 until shortly after SERC ceased its voluntary
SEC reporting. No public market presently exists for SERC securities. There are
no market makers and no trading activity has occurred since SERC closed its
solar business and ceased voluntary reporting. SERC, by virtue of effectiveness
of Form 10 filed with the SEC in 1993 to register its securities, is presently
subject to the informational reporting requirements of the Exchange Act. SERC is
presently current with SEC filings and has been current with SEC filings since
registration under the Exchange Act.
In the event of a private sale or other event requiring a transfer of
SERC's shares, SERC's transfer agent effects the cancellation of the old
certificate and the issuance of a new certificate.
Telegen plans to apply for a listing of post-Acquisition SERC on the NASDAQ
Small Cap Market once the Registration Statement of which this Information
Statement-Prospectus is a part becomes effective. As a result of the
Acquisition, it is expected that SERC will have (i) in excess of $4 million in
gross tangible assets, (ii) in excess of $2 million in tangible net worth, (iii)
at least 300 holders of SERC common stock, and (iv) at least 100,000 publicly -
held shares of SERC common stock and thus, assuming that two registered and
active market makers are obtained and the securities will have a minimum bid
price of $3 per share, will satisfy the requirements for listing on the NASDAQ
Small Cap market system. However, there is no assurance that (i) SERC will
indeed qualify for such listing or (ii) following the Acquisition a regular
trading market will in fact develop for purchase or resale of SERC's securities.
The following table shows the high and low bid of SERC's common stock
during the last three years. SERC believes that there has been no public trading
activity during the periods shown.
SERC Common Stock
Per Share Per Share
High Bid Low Bid
1993
3rd Quarter $0.00 $0.00
4th Quarter $0.00 $0.00
1994
1st Quarter $0.00 $0.00
2nd Quarter $0.00 $0.00
3rd Quarter $0.00 $0.00
4th Quarter $0.00 $0.00
1995
1st Quarter $0.00 $0.00
2nd Quarter $0.00 $0.00
3rd Quarter $0.00 $0.00
4th Quarter $0.00 $0.00
1996
1st Quarter $0.00 $0.00
2nd Quarter $0.00 $0.00
Holders
As of July 31, 1996, there were approximately 2,239 shareholders of record
of SERC's common stock. Based upon requests received by SERC for copies of its
recent Information Statement issued in connection with the Special Meeting of
Shareholders, SERC believes approximately 20 out of the total 2,239 shareholders
of record are brokerage firms or other similar entities which hold SERC's shares
in street name for their clients. SERC's transfer agent is United Stock Transfer
Inc., 13275 East Fremont Place, Suite 302, Englewood, Colorado 80112-3910.
SERC has never paid a cash dividend on its common stock and has no present
intention to declare or pay cash dividends on the common stock in the
foreseeable future. SERC intends to retain any earnings which it may realize in
the foreseeable future to finance its operations. Future dividends, if any, will
depend on earnings, financing requirements and other factors.
Description of SERC Securities
SERC is authorized to issue 100,000,000 shares of $.50 par value common
stock and 25,000,000 shares of no par value voting preferred stock. After giving
effect to the redomiciliation of SERC as a California corporation, the SERC
common stock will have no par value. Shares of SERC's common stock have equal
voting rights, one vote per share, and are not assessable. All shares of
preferred stock have voting rights and are not assessable. Voting rights are not
cumulative, and, therefore, the holders of shares entitled to cast more than 50%
of the total votes possible could, if they chose to do so, elect all the
Directors. SERC's Articles of Incorporation permit its Board of Directors to
issue its preferred stock in series designated by the Board. Each series must
designate the number of shares in the series and each share of a series must
have identical rights of (1) dividend, (2) redemption, (3) preferences in
liquidation, (4) sinking fund provisions for the redemption of shares, and (5)
terms of conversion. No preferred stock is currently issued or outstanding.
Upon liquidation, dissolution or winding up of SERC, the assets of SERC,
after satisfaction of all liabilities and distribution to preferred
shareholders, if any, would be distributed pro rata to the holders of the common
stock. The holders of the common stock do not have preemptive rights to
subscribe for any securities of SERC and have no right to require SERC to redeem
or purchase their shares.
Holders of common stock are entitled to dividends, when and if declared by
the Board of Directors of SERC, out of funds legally available therefor. SERC
has not paid any cash dividends on its common stock, and it is unlikely that any
such dividends will be declared in the foreseeable future.
The SERC Board of Directors has designated 150,000 of the authorized shares
of SERC preferred stock as Series A Convertible Noncumulative Preferred Stock
("Series A Preferred Stock") of which 112,750 shares are to be exchanged with
Telegen preferred shareholders in the Acquisition. The holder of each share of
Series A Preferred Stock is entitled to one vote per share of common stock into
which the Series A Preferred Stock is convertible. The Series A Preferred Stock
is convertible into common stock (a) at the holder's discretion, and (b)
automatically in the event of (i) a public offering of SERC's common stock at a
price not less than $15 per share, or (ii) the affirmative vote of 67% of the
shares of the Series A Preferred Stock. In all cases, the conversion rate will
initially be one to two (1:2), subject, in certain circumstances, to
anti-dilutive adjustments. The holders of Series A Preferred Stock have a
noncumulative right to receive dividends at a rate of $.80 per annum on each
outstanding share of Series A Preferred Stock if declared by the SERC Board of
Directors and in preference to the common stock. In the event of liquidation,
each share of Series A Preferred Stock is entitled to receive, in preference to
the common shareholders, an amount equal to $10, depending on certain
circumstances, which may be paid in cash or securities of any entity surviving
the liquidation.
Legal Proceedings
There currently is no pending or threatened litigation against SERC, any
officer, director, affiliate, or beneficial owner of 5% or more of the common
stock of SERC.
SERC's primary activity from 1985 through 1992 was the settling of various
judgments relating to SERC's discontinued solar business. During 1992, SERC
settled a judgment from 1981 for $6,600 to be paid when SERC has sufficient
cash. SERC has continued to negotiate directly with four of the creditors
holding judgments as of December 31, 1995. These negotiations were activated in
1992. SERC believes a settlement can be concluded to satisfy the four remaining
judgments for an additional $11,397 plus accrued interest of on all matters
totaling $4,551. SERC believes that no further representation by counsel will be
necessary to conclude these matters.
SERC has been represented by legal counsel with respect to the old debts of
its discontinued solar business. Counsel has agreed to accept up to 40% of fees
for such representation in shares of SERC's common stock. As of December 31,
1995 counsel was issued 345 common shares and is owed $839 cash for such
services. No services were required by counsel during 1994 and 1995 and there
was no change in this arrangement for services or compensation.
TELEGEN
Business of Telegen
Telegen Corporation is engaged in the conception, development and marketing
of proprietary products in the Telecommunications, Flat Panel Display and
Internet Hardware markets. At present, Telegen is organized into three
divisions, including one product-related division (Telecom Products Division),
one developmental stage division (Internet Products Division) and Telegen
Laboratories, an advanced R&D "think tank", plus a subsidiary, Telegen Display
Laboratories, Inc.
Telecommunications Industry Background
The consumer electronics market is one of the fastest growing segments of
today's economy. Witness the proliferation of electronic products and services
that are pervading every aspect of our lives. 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.
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 addition to these peripherals products, the telephone companies
themselves have adapted strategies to offer a wide range of new services to both
business and residential consumers. By the early 1990's, the local telephone
companies were offering a full complement of auxiliary features in addition to
basic telephone service, features such as Speed Dial 8/30, Call Waiting, 3-Way
Calling, Call Forwarding and Caller ID. The local telephone companies had
discovered the substantial profit potential of these products, since the
incremental cost for these new services are insignificant (they are just
"programmable options" in the Central Office computer switches). Depending upon
the local telephone company, consumers can pay up to $5.00 per month for each
service as well as up to $20.00 to initially activate the service. The telephone
companies, however, are careful about the types of services they offer their
customers. All these services are designed to increase usage of telephone
service, such as spend more time on the phone (Speed Dial 8/30), not to miss a
call (Call Waiting, Call Forwarding), even to have two calls at the same time on
one line (3-Way Calling). The telephone companies generally do not offer
services to lower the cost of calls or to restrict outgoing calls.
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 (extension) 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.
Along with this period of rapid growth and expansion in the
telecommunications industry, the breakup of AT&T in 1984 ushered in the advent
of telephone deregulation. Initially, only long distance service was deregulated
nationwide and, over a period of a few years, consumers were given the
opportunity to select a carrier for long distance calls independent of their
local telephone company. Today, Telegen believes that more than 700 suppliers
compete for the $80 billion a year long distance market.
In order to provide the Regional Bell Operating Companies (often called
"RBOCs" or "LECs"), with a secure source of revenue, the FCC devised a two-tier
system of long distance dialing. Calls between states (inter-state or
"Inter-LATA" calls) were deregulated and could be carried by any long distance
company (but not by the RBOC). Within each state, geographical areas were
devised, based upon traffic patterns, called Local Access Transport Areas
("LATA"). Calls inside these LATAs ("Intra-LATA calls" or local toll calls)
could only be carried by the RBOC. Without competition, rates for these
IntraLATA calls remained high, sometimes many times higher than calling across
country.
Over the past few years, deregulation has finally come to the IntraLATA
market, with states across the country opening up their monopoly local telephone
markets to competition. Long distance and local toll call traffic is now
deregulated. Telephone users now have the opportunity to select a long-distance
carrier to carry their local toll calls at a substantial savings over the rates
of the RBOCs. In order to preserve enough IntraLATA revenue for the RBOCs to
maintain low cost basic service, callers must first dial the selected
long-distance carrier's five-digit access code before each call that is to be
re-routed to a long distance carrier. Calls dialed without this access code are
carried by the RBOC, usually at higher cost.
Further complicating this procedure is the fact that most consumers have a
free calling area that is paid for in basic monthly service. For these calls, a
consumer would probably prefer to use the RBOC as opposed to a long distance
carrier. The effect is that the caller needs to know the exact geographical area
in his LATA, the exact calls that fall into the local free area but exclude
those already automatically routed to his long distance carrier, and then
remember to first enter the access code before dialing the telephone number.
Based on industry estimates, Telegen believes that this complexity results in
only 5% of such calls being effectively routed, and most of those are done by
sophisticated business telephone systems that are pre-programmed.
This complexity in the market has created a business opportunity for the
marketing of Telegen's ACS to automatically re-route the appropriate Intra-LATA
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 major
long-distance carriers have expressed significant interest in the ACS product
and are presently in market trials to evaluate use of Telegen's products.
California, which deregulated in January 1995, represents about 30% of the
nation's estimated annual $12 billion Intra-LATA toll call market
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. Telegen has been advised that by
legislation, Caller ID must be offered in all states as of 1996. The service is
scheduled for introduction in California in June 1996.
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, especially in California, where according to
industry information up to 62% of consumers (10.6 million people) have unlisted
telephone numbers. 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.
Telegen products are designed for sale to the consumer and small business
segments of the telecommunications accessories products industry. The
TeleBlocker and ID Blocker are intended to serve consumers in residential
environments who wish to control their telephones, and are thus considered
"retail telephone accessories." The ACS 2000 is sold to long distance telephone
companies for use in the premises of their small business customers, and is thus
considered a "small business telephone accessory".
Telecom Products Division
The Telecom Products Division ("Telecom") 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, Telegen introduced its initial telecommunications products,
a series of four (4) outgoing telephone call restrictors known as "TeleBlocker".
These accessories, priced from $49.99 to $149.99, 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 Telegen'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
Telegen's Customer Service Representatives to directly service and program any
Telegen 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. Telegen believes that this patent pending
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.
In 1993, Telegen began development of a series of telecommunications
products, based upon its proprietary Parallel and RPS Technologies, which are
designed to give consumers and small businesses greater control of their local
telephone service by replacing most of the functions previously provided by the
local telephone company. The first products based upon this new technology are a
series of call-routing devices called Automatic Carrier Selectors ("ACS"). The
ACS 2000, announced in January 1995, is a single-line device which intercepts
calls destined for the user's local toll call area (an Intra-LATA toll call) and
re-routes that call onto the network of the user's long-distance carrier in
order to take advantage of generally lower calling expense. The ACS 2000 also
provides a number of custom calling features, such as Outgoing Call Restricting
and Intelligent Redialing.
In October 1995, an upgraded model, the ACS 2010, was introduced to support
Centrex systems and the new "Fax and Forward" networks being installed by the
long distance carriers. More advanced and feature rich models of the ACS series
are expected to be introduced in 1996, including a complete home PBX product
priced under $200 at retail.
Telegen has also developed a four-line call-routing system called the
Multi-Line Device ("MLD"), aimed at the small business market. The MLD 1000,
first in the MLD series of products, provides enhanced routing capabilities and
expandability up to 60 lines, as well as custom calling features such as Speed
Dialing, Account Codes, Call Hold, Redial and Credit Card Dialing. The second
model in the product line, the MLD 2000, is expected to be introduced in the
third quarter of 1996, providing small businesses with full PBX features at a
cost below that of competing systems.
Telegen has also introduced a product called "ID Blocker", which allows
consumers to maintain privacy by automatically blocking a caller's telephone
number from appearing on the screen of receiving telephones equipped to identify
the telephone numbers of incoming callers (a service known nationwide as Caller
ID). This device utilizes Telegen's Parallel Technology (one device for all
telephones on a line) to provide a solution to the privacy concerns of
consumers.
Current Telecom Products
TeleBlocker. The TeleBlocker is a series of outgoing call restrictors,
designed to enable consumers and business owners/managers to eliminate or reduce
expensive 976, 900, long distance, 411, international and other toll calls.
Several models can also restrict specific calls to specified times of the day
and for specified periods of time. The TeleBlocker series of products provides
to the consumer electronics marketplace certain advanced features previously
available only on expensive PBX and business telephone systems. All products are
designed to be easily programmable either by the user or by the Telegen Remote
Programming System and meet the needs of the general consumer at an affordable
price. The TeleBlocker series of products was originally introduced in 1991 and
includes the TeleBlocker 100, 200, 300 and Plus, designed to retail from $50 to
$150.
This pricing structure has been achieved by designing each product for
high-volume, low-cost manufacturing in relatively unsophisticated assembly
plants. Additionally, each product has been designed for easy mechanical
assembly into a low-cost molded plastic case which snaps together with just two
screws. The assembled product in the plastic case is then fully tested in less
than one minute on a fully-automated test system developed by and proprietary to
Telegen. This automated testing capability, which is built into every Telegen
product, allows for 100% testing of every product produced at the assembly
facility as well as random lot testing and post-installation testing at any
Telegen approved location or over the telephone by the Remote Programming
System. Partially because of this automated testing capability, Telegen provides
a one year warranty on all of its products for parts and labor.
The TeleBlocker line includes products to control the usage of a single
instrument, multiple instruments or entire telephone lines. These products are
marketed under the trademark "TeleBlocker." One model of TeleBlocker has also
been produced by Telegen for AT&T under private label, using their trade
designation "Call Controller 9050."
The principal microprocessor, a major electronic component of the
TeleBlocker product, went out of production and is no longer available. Telegen
has now redesigned the TeleBlocker product to be produced using alternative
components and the manufacturer is now ready to commence production of the
redesigned unit.
Remote Programming System ("RPS"). All programmable Telegen products are
capable of being programmed and serviced over the telephone lines from the
Telegen Customer Service Center using the RPS. The Telegen 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. Telegen 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".
Automatic Carrier Selector ("ACS"). Using a long distance carrier for
Intra-LATA calls is generally a lower-cost option for consumers than using the
local telephone company. However, in order to take advantage of this cost-saving
opportunity, the caller must first enter the long distance carrier's five-digit
access code before each call. This requires that the caller know which calls are
of that type, as opposed to local free calls or already automatically routed
long distance calls, and then remember to first enter the long distance
carrier's access code before dialing the number. These procedures are used by
very few callers and the complexity results in only 5% of such calls being
effectively re-routed, and most of those are routed by sophisticated business
telephone systems that are programmed by automated computer systems.
Telegen's ACS 2000 is a telephone accessory that enables consumers to
realize significant savings in many areas. Because the ACS 2000 utilizes
Telegen's Parallel Technology, only one unit is required to cover all telephones
on a line. Installation is as easy as plugging in a telephone, and programming
and set up are accomplished by dialing a phone number to receive automated
programming over the telephone line.
Since the deregulated calling area for each subscriber is based on one's
unique telephone number and is regulated by state agencies, each ACS must be
individually programmed to recognize the types of calls to be routed. This type
of programming would be extremely difficult for most consumers and could take
literally hours to do. Commercial routing devices for business applications take
approximately 45 minutes to program with a specialized computer. However, with
the ACS 2000, programming is accomplished with minimal customer involvement by
using Telegen's RPS. The customer plugs the unit into a standard telephone wall
jack, lifts the handset and dials "111*" on the keypad of the telephone. The ACS
automatically dials Telegen's toll-free Customer Service Center. The customer is
asked a few questions and then the appropriate routing information is
electronically transmitted to the ACS within a few minutes.
After programming, the ACS will automatically insert the access code of the
caller's desired long distance carrier in front of all calls appropriate to
reroute onto the long distance network. For local free calls and Inter-LATA long
distance calls, no rerouting will be required or inserted by the ACS. The user
will automatically receive the benefits of the rerouting without having to
change their normal dialing pattern and without the risk of re-routing an
otherwise free call, as can happen with manual dialing. When changes occur in a
customer's dialing area (new area codes or prefixes), the ACS automatically
calls into the RPS to receive new programming instructions. Telegen knows of no
other comparable device presently on the market which provides this re-routing
capability to consumers.
Besides its routing capabilities, the ACS also features Caller ID Blocking,
Last Number Redial and Call Restricting functions. Caller ID Blocking produces a
signal to the local telephone company's central office that will block the
identification of the caller each time an outgoing number is dialed. Last Number
Redial allows the caller to redial the last correct telephone number dialed with
a brief code rather that dialing the entire number again. The Call Restricting
feature enables the consumer to restrict certain types of outgoing calls such as
pay-per-use (976/900) numbers (800) numbers, 411, international or unauthorized
long distance calls.
The long distance carriers have expressed interest in purchasing ACS
products since it would allow them to capture a portion of the IntraLATA traffic
that presently is carried by the RBOCs, as well as allowing them to retain their
existing customers by providing features not available from the RBOCs or other
carriers. Telegen and MCI signed a contract in March 1996 providing for a
minimum deliver of 6,000 ACS 2000 units during the first year of the contract.
The ACS 2000 was announced in the first half of 1995 and commercial shipments
commenced in mid-1995. Further, Sprint has been conducting a market trial of the
ACS 2000, with their customers. However, sales of Telegen's ACS 2000 product
have not been significant to date.
Telegen entered into a Nationwide Master Distribution and Service Agreement
for the ACS series of products with MCI Telecommunications, Inc. in March 1996.
Telegen's research and development plans for 1996 including adding a number of
additional new features to the ACS, enabling it to become effectively a full
service "PBX" type device for the home.
Multi-Line Device ("MLD"). The Multi Line Device ("MLD") is a four-line
routing system designed to accomplish the same function as the ACS 2000, except
that it is designed for use by small businesses with up to 60 telephone lines
and with no sophisticated central telephone system. The MLD 1000 enables small
businesses to realize savings in areas where local toll calls have been
deregulated, as well as providing additional custom features such as Speed
Dialer, Account Codes, Hold, Intelligent Redial and Credit Card dialing. The
installation, programming and use of MLD are similar to those of ACS 2000, as
described above. MLD is presently being field tested. The MLD 1000 was announced
in the first half of 1995. The MLD 1000 is in final Beta testing (test
installations in the field) and production and shipments could commence as early
as the fourth quarter of 1996 although there is no assurance that production and
shipment will commence at that time and the actual time may be affected by the
results of the Beta tests.
In addition, Telegen is now developing an advanced MLD model which is
designed to provide sophisticated PBX-type features to small businesses at a
cost significantly below comparable products currently known to be available in
the market. This product, called MLD 2000, is aimed at the business market
presently using Centrex or Comstar services from the local phone company. It
provides advanced routing capabilities (up to 8 carriers) as well as full
Centrex operation and key system PBX features, at a price comparable to just the
installation cost of Centrex. MLD 2000 is scheduled to be introduced in the
second half of 1996.
ID Blocker. Caller ID service has become popular with consumers and is
presently available or planned in 48 states. This service, available through the
local telephone company, allows the user to read the telephone number, and
sometimes even the name, of a person calling in, regardless of whether that
number is listed or unlisted.
This service has raised concerns regarding privacy and created interest in
the ability of a caller to protect his or her identity when making calls. In
fact, state regulators usually require telephone companies to provide their
customers with a way to protect their identities when making a call as part of
the regulatory permission they have received to offer Caller ID. The FCC has
mandated this "Per Call" feature in its 1995 ruling allowing interstate Caller
ID service. This feature is usually provided by dialing "*67" prior to each call
in order to block Caller ID on that outgoing call. Any call not preceded by *67
will not have its Caller ID service blocked. Since most consumers do not like to
dial extra digits when making a call, Telegen believes there is a large market
for a simple telephone accessory to provide complete and seamless protection.
Telegen's ID Blocker is a simple accessory that automatically dials "*67"
before each and every call, eliminating the need for the caller to both remember
and then dial the code. ID Blocker installs by simply plugging into any
telephone wall jack. It requires no set up or programming. Telegen's ID Blocker
is in final Beta testing (test installations in the field) and production and
shipments could commence as early as the fourth quater of 1996 although there is
no assurance that production and shipment will commence at that time and the
actual time may be affected by the results of the Beta tests..
In addition to its value as a stand-alone product, the ID Blocker
technology has been included as a programmable feature in the ACS and MLD
products, enhancing their value to the consumer.
Telecom Strategy
Telegen's Telecom Products Division's business strategy is to invent,
design, and produce products with enhanced and proprietary technologies
providing cost savings and competitive advantages. Telegen only pursues
development of products that it believes will have a significant market and
broad consumer appeal, and that it expects will provide substantial cost savings
or functional advantages to the user. Telegen designs into its products what it
believes are unique functions or services to distinguish it from its
competitors. Telegen does not develop or market products where competition is
intense and margins are thin. Telegen's distribution strategy is to sell through
manufacturers' representatives or to nationally-recognized distributors under
both its own label and private label. Telegen believes this approach to selling
its products will give it the widest distribution possible, while minimizing
investment in distribution. Telegen's manufacturing strategy is to outsource all
production practicable to third-party contract manufacturers who specialize in
the manufacture of similar products, thereby enhancing quality assurance while
minimizing investment in plant and equipment.
Telecom Sales and Marketing
In the summer of 1992, Telegen began discussions with AT&T regarding
purchase and private label of the Telegen TeleBlocker 200. AT&T, after much
study and consumer focus groups, determined that a telephone call restrictor for
home and small business use was a desirable product with substantial market
potential. Telegen was advised by AT&T that, because of its quality, features
and ease of use, TeleBlocker was chosen as the initial product offering,
marketed as the AT&T Call Controller 9050. The first Call Controller 9050s were
delivered to AT&T on May 31, 1993, with the first market being the 400 AT&T
Phone Center Stores nationwide. See "Licensing".
Current distribution channels for Telegen's TeleBlocker products include
the RBOCs, specialty catalogs and other distributors, such as retail phone
stores. In addition, Telegen 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.
Telegen has entered into distribution agreements with several 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.
Telegen has developed distribution relationships directly with a number of
the large long distance carriers. Currently, Telegen is distributing ACS units
to Sprint for use in a consumer marketing trial in California. Telegen has also
distributed ACS units to MCI for market field trials and has recently entered
into a Nationwide Master Distribution and Service Agreement with MCI. Telegen is
also in discussions with two other national distributors for OEM relationships
for its full line of products.
Telegen has initiated a marketing program to re-introduce certain of its
products directly into the retail market in 1996. Telegen has begun efforts to
re-establish a national sales representative network. Five regional
representatives entered into agreements with Telegen in 1995. Significant new
facets of Telegen's marketing capabilities, including new sales material,
packaging and point of sale displays, may require substantial additional
expenditures including additions to facilities and personnel.
Telecom Competition
TeleBlocker. Telegen 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. For example, unlike any other "telephone blocking
device," the TeleBlocker is able to block specific telephone numbers, allow
calls to a specific telephone number for only a specified number of calls per
day and/or permit a call to a certain number to stay connected for only a
limited number of minutes in length. Telegen also believes its products are
superior in quality and have advantages over the competition such as cost
controls, ease of use, performance and RPS capabilities.
As a result of consumer activism, the local telephone companies have been
forced to provide blocking for 900 and 976 numbers. The telephone companies
provide this blocking as a one-time, complete restriction service free of charge
in areas where the central office can accommodate such restriction. If the
service is deactivated at the consumer's request and subsequently reinstated,
many of the phone companies charge a one-time installation fee with a monthly
fee thereafter. In addition, no local telephone company offers a service which
restricts all outgoing calls, selected outgoing calls or long distance calls.
Telegen believes that, because these services are the basis of the telephone
companies' revenues, it is unlikely that such a service will be offered.
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 Telegen'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
Telegen's RPS in 5 minutes or less) and (4) retail at prices of 2-3 times the
retail price of the ACS. Telegen believes that there are no other devices which
operate in parallel or that are supported and programmed by a system comparable
to RPS.
Competition could arise in the future, however, through reprogramming of
local telephone companies' central office equipment to allow electronic
connection by the local telephone company customers to the long distance carrier
of their choice ("equal access") without "dialing around" by manually inserting
the preferred long distance carrier's access code before dailing each long
distance telephone call. Since this "dial around" process is the principle
function of Telegen's ACS 2000 product, its useful life could effectively end if
such "equal access" features were introduced. Availability of "equal access"
would have to come about through regulatory proceedings at the various state
Public Utilities Commissions. A number of states have already mandated the
introduction of "equal access" and it is unknown if and when "equal access" will
be mandated in all states. The Federal Telecommunications Act of 1996 has opened
up significant competition for local toll service and has added to the
competitive environment in which Telegen's ACS 2000 is attractive due to its
capability of enabling the telephone to automatically connect with a desired
carrier. Telegen is developing upgraded versions of the ACS series which will
include numerous Custom Calling features as well as routing capabilities, to
enhance the market acceptance of the products after "equal access" is broadly
available. Telegen's management believes that the Telecommunications Act of 1996
will not have a material adverse effect on Telegen's financial condition and
results of operations.
Multi-Line Device ("MLD"). The principal competition to Telegen'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. Telegen believes that the "Mitel Smart One" is more difficult and
costly to install and program than the MLD, as well as lacking expandability.
Also, unlike the MLD, it is incompatible with calling patterns in certain areas
of the country. Telegen 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 Telegen's MLD
as does the Mitel Smart One.
ID Blocker. Telegen 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 Telegen's ID Blocker. Telegen 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.
Telecom Licensing
Telegen has established a corporate policy to actively explore licensing
opportunities for both its products and technologies. Telegen has a number of
proprietary technologies, for which it has secured either patent or trade secret
protection, and which Telegen believes are licensable. Chief among these are the
Parallel Technology (as used in ACS) and the RPS technology (used in all Telegen
programmable products). These technologies can be used to enhance or develop a
wide variety of products. Telegen 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,
expected in 1996, would greatly enhance licensing opportunities. Telegen has
also been approached by a number of manufacturers to sell or license the ACS
technology for incorporation into finished telephones. See "Intellectual
Property".
In conjunction with the sale of Call Controller 9050 to AT&T, Telegen
entered into a license agreement with AT&T providing for the sale of two RPS
computer systems and software for a one-time fixed charge with the limitation
that such systems be used by AT&T only for the programming of Call Controllers
sold by AT&T, and that all rights and title to the technology remain with
Telegen. Telegen is also presently in discussions with MCI regarding the
purchase of up to 8 RPS computer systems and the licensing of their use in
supporting future ACS and MLD deliveries by MCI.
Telecom Manufacturing, Suppliers, Service and Warranty
Telegen telecom products are currently being manufactured in Hong Kong and
The People's Republic of China by Crystal Field Ltd., a local small unrelated
contract manufacturer who meets Telegen's specifications for quality. Telegen
has had a manufacturing relationship with Crystal Field since May 1991 and
believes it currently has adequate capacity at an acceptable level of quality
through Crystal Field to meet all of Telegen's projected requirements for the
next two years. However, Telegen contracts with Crystal Field on a purchase
order basis without a long-term supply arrangement and does not currently have
alternative capabilities to manufacture its products under contract, either
internally or through third parties. In the event that there were an
interruption of production or delivery, Telegen's ability to deliver products in
a timely fashion would be compromised, which would materially adversely affect
Telegen's results of operations. Telegen 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, and Telegen is currently
negotiating with another manufacturer in Malaysia to provide additional and
alternative production capacity.
Telegen also plans to consolidate many of the components in certain of its
products into custom integrated circuits, which Telegen believes will materially
simplify and reduce the cost of manufacturing, potentially making manufacture of
Telegen's products in the United States economically feasible.
Telegen has developed a custom integrated circuit known as an ASIC for its
ACS products. This ASIC should contribute to further cost reductions for the
products. These ASICs were phased into the production of the ACS product in
early 1995. Other ASICs are being designed for use in MLD as well. Certain
components used in Telegen's products, such as the microprocessors, are
available from only a limited number of sources. Although to date Telegen has
generally been able to obtain adequate supplies of these components, Telegen
obtains these components on a purchase order basis and does not have long-term
contracts with any of these suppliers. In addition, some suppliers require that
Telegen either pre-pay the price of components being purchased or establish an
irrevocable letter of credit for the amount of the purchase. See "Risk
Factors-Dependence Upon Single Manufacturing Source; Limited Number of Component
Suppliers".
Telegen provides a one year warranty for parts and labor on all products.
The customer must return the product to Telegen's facility, shipping pre-paid,
for repair or replacement. Telegen charges cost of goods sold for the estimated
expense associated with providing this warranty service. Management believes
that it has adequately provided for the costs of warranty service.
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 LCD 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
Active Matrix LCD 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 manufacturing and 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 30 inches or more. 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 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 actively negotiating
with several prospective strategic partners to obtain substantial new capital in
the form of either equity investment in TDL or project financing to complete the
application design of its HGED production processes, to develop plant and
product specifications, and to build a prototype production facility. Topics
currently being negotiated include the protection of all intellectual property
rights and specifications for the initial plant and equipment. 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
has created Telegen Display Laboratories, Inc., a subsidiary of Telegen ("TDL").
TDL's initial production facilities will be located in Silicon Valley and it
plans to license the manufacture 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 its new facilities
in 1997 which could produce up to 40,000 displays per year, and to build a full
scale production plant (one million displays per year capacity), the completion
of which is not likely to occur before the end of 1997, with the proceeds from a
future funding. Further, Telegen has sold to IPC - Transtech Display (Pte.)
Ltd., a Singapore joint venture investment group, a 10% equity investment in TDL
in exchange for $5 million cash. Along with the investment, the joint venture
will have an option to acquire licenses to build four plants, each with the
capacity to produce one million flat panel displays per year. The total license
fees for these plants is $40 million, plus royalties. However, Telegen does not
currently expect to have any such licenses in place before June 1997, or any
significant production of displays thereunder before June 1998.
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. This basic patent allows the building of highly cost effective flat
panel displays without the use of high-tech, semiconductor facilities. 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 10 inch diagonal
flat panel displays per year.
Flat Panel Market. Since Telegen anticipates that an HGED display may cost
less than 20% of an equivalent AMLCD display, Telegen believes it may have a
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 specific bids from suppliers, (ii) estimates of the cost
to purchase manufacturing equipment (some of which have already 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.
TDL's initial plan is to produce a 20 inch diagonal, high resolution
workstation flat panel display aimed at the growing computer aided design and
computer aided manufacturing (CAD/CAM) markets led by systems houses such as Sun
Microsystems and Silicon Graphics, which are potential customers. TDL picked
this market to introduce the HGED because it knows of no competitors with a 20
inch flat panel product.
Initial commercial shipments of HGED products in limited quantities are
currently expected to commence before the end of 1997. However this estimate is
subject to change.
Flat Panel Competition. 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
Active Matrix LCD (AMLCD). Of the two LCD technologies, the AMLCD is far
superior in terms of image quality. These displays are manufactured in high
volume by a number of Japanese companies, including Toshiba and Sharp
Electronics. The largest commonly available AMLCD full color screens are 11"
diagonal and cost from $15-$17 per square inch to manufacture.
Sony has recently introduced a color plasma flat panel display of 17"
diagonal size which will be available in Japan for $15,000 retail. Full-color
plasma screens which are not in any volume production yet, lack 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 Silicon Video, 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 cost about $1.50 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.
Internet Products Division
According to industry sources, less than 20 million people "surf" the
Internet in the United States today. Telegen Laboratories is presently
developing easy-to-use consumer products which are intended to allow
non-computer literate consumers to access some of the capabilities of the
Internet. These products, called "InterNet Appliances", require no computer or
external software to operate and, if they do require any set-up, will be
supported by Telegen's RPS system.
At present, the IPD is developing InterNet Appliances for use by E-mail
systems and to utilize the Internet for making world-wide telephone and data
calls at lower cost compared to standard telephone rates.
All IPD products are currently in a development stage and may never result
in commercially feasible or marketable products.
Internet Products Competition. Most Internet "products" are currently
software. Telegen knows of no other telephone accessories similar to those
planned by Telegen which are designed to operate with the Internet as conceived
by Telegen. However, since much of the value of these planned products is in the
software, it is possible that such software is currently under design or
possibly even available to operate within large telephone PBX/Key Systems in
larger business environments.
Telegen Research and Development
Telegen's research and development expenses for the years ending
December 31, 1995, 1994, 1993 and 1992 were approximately $826,984, $830,913,
$37,955, and $9,317, respectively. Telegen estimates that its total expenditures
for research and development will aggregate at least $2,800,000, including the
flat panel display (HGED), during the 12 months following completion of the
Acquisition. Much of the Telegen Display Laboratories portion of R&D, which
totals about $1.5 million, is equipment and related overhead costs. In 1993,
Telegen's 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. A number of these products became commercially available in 1995,
and Telegen believes increasing sales of these products will be reflected in
Telegen's 1996 revenues. 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 will be 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 1996 and early 1997. There
can be no assurances, however, that such investment in additional research and
development will result in products that are commercially successful or
profitable.
The market for Telegen's products is characterized by rapid technological
change and evolving industry standards and is highly competitive with respect to
timely product innovation. The introduction of products embodying new technology
and the emergence of new industry standards can render existing products
obsolete and unmarketable. Telegen's success will be dependent in part upon its
ability to anticipate changes in technology and industry standards and to
successfully develop and introduce new and enhanced products on a timely basis.
If Telegen is unable for technological or other reasons to develop products in a
timely manner in response to changes in the industry or if products or product
enhancements that Telegen develops do not achieve market acceptance, Telegen's
results of operation will be materially adversely affected. Telegen has
experienced delays in its development of the ACS product line. The delays in the
development of ACS product resulted in the loss of about six months' of sales
and earnings opportunity. This resulted in Telegen absorbing the total operating
costs, without any revenues, of about $1.25 million during that period.
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
filed in June 1994, and is expected to be issued in 1996.
Telegen Display Laboratories filed its first very broad and basic U.S.
patent on the HGED in December 1995.
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. In January 1991,
a claim against the TeleBlocker technology was made by the founder's former
employer. Telegen vigorously defended the claim and the former employer
relinquished all claims made against the technology.
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. See "Risk
Factors-Intellectual Property".
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.
In order to fully comply with these regulations, 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. 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 24 persons on a full-time basis, including three
executive officers, 8 software programmers and hardware engineers, one marketing
and sales employee, and a general support staff. Telegen considers that its
employee relations are good. 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. See "Risk Factors-Dependence on Key
Personnel".
Facilities
Telegen's corporate offices, as well as the offices of Telegen Display
Laboratories, Inc., are currently located in Foster City, California, where
Telegen leases approximately 10,000 square feet of space at a cost of
approximately $15,000 per month, including common area charges, under a lease
that expires in August 1996. Telegen plans to relocate its corporate offices to
Redwood City, California pursuant to an executed five-year lease (the term of
which commences in August 1996) of approximately 30,000 square feet of office
space at a cost of approximately $46,000 per month. Telegen believes 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.
Telegen Management's Discussion and Analysis of Financial Condition and Results
of Operations
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. Telegen has
incurred significant operating losses in every fiscal year since its inception,
and, as of December 31, 1995, Telegen had an accumulated deficit of $5,301,857
and working capital deficit of $1,762,182. Telegen expects to continue to incur
substantial operating losses through 1996. 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.
Results of Operations
Revenues. Product revenues for 1994 were $432,972, compared to $498,358 for
1993, $162,447 for 1992 and $81,175 for 1991. These sales consisted primarily of
TeleBlocker and, after 1992, AT&T Call Controllers. In 1994 Telegen experienced
a significant delivery of Call Controllers to AT&T, representing a non-recurring
revenue infusion of $254,297. Product revenues for the year ended December 31,
1995, were $145,795, compared to $432,972 for the comparable period in 1994.
These revenues consisted primarily of sales of the ACS 2000 in 1995 and
TeleBlocker in 1994. Product revenues for the first half of 1996 were $14,945
compared with $106,235 for the first half of 1995. Delays which resulted in the
MCI contract not being finalized until March 1996 significantly impacted ACS
revenues for the first half of 1996. In addition, the Company's TeleBlocker
product which made up the bulk of revenues for the first half of 1995 was taken
off the market in June 1995 for redesign. The removal of TeleBlocker from the
market in June 1995 resulted in an estimated loss of about $115,000 in sales and
$15,000 in gross profits and net cash flow.
Delays in government deregulation of the Local Access Transport Area
("Intra-LATA") phone service in California, which represents 30% of all
Intra-LATA toll call service nationwide, resulted in lower revenues in fiscal
1994 as compared to fiscal 1993 and significantly lower revenues in the first
ten months of 1995. This delay in deregulation, which was originally scheduled
for early 1994, significantly limited the market for Telegen's ACS line of
products. Market and lab testing of the ACS 2000 by long distance carriers,
previously expected in 1994, was delayed into 1995. With deregulation in
California implemented in early 1995, one year behind schedule, Telegen's
principle customers, the long distance carriers, commenced significant
laboratory and beta testing of the ACS product line, resulting in approvals by
AT&T Bell Laboratories, Sprint Labs and the MCI Developers and Network Labs. In
the last quarter of 1995, Sprint began a consumer market trial of the ACS 2000
in California. That trial is on-going. In March 1996, MCI and Telegen entered
into a Nationwide Master Distribution and Service Agreement for the ACS 2000
series of products. Telegen will begin shipping significant amounts of these
products as early as the second half of 1996.
Cost of Goods Sold. Cost of goods sold for the first half of 1996 was
$12,082 and for the first half of 1995 was $97,025. These costs were consistent
with revenues for the same periods. Cost of goods sold of $170,421 for the year
ended December 31, 1995, and $314,239 for the comparable period in 1994,
consisted of the direct manufacturing costs, transportation, duty and warranty
costs of the units sold. In addition, cost of goods sold for 1995 included a
one-time charge to write off obsolete inventory. The inventory write-off in 1995
related to components originally purchased for ACS 2000 units which, following
some redesign work, were no longer usable. Telegen has now adopted a purchasing
policy designed to prevent the purchase of components unless they are for
current designs of products for which there is an existing order or which has,
in the opinion of Telegen management, a relatively immediate alternative market.
Certain overhead costs associated with Telegen's operations are allocated to
research and development expenses. Cost of goods sold for 1994 was $314,239,
compared to $296,285 for 1993. Margins in 1993 and 1994 were affected by
temporary shortages, and resulting higher costs then in 1992, of microprocessors
used in Telegen's products, and of amortization of costs incurred in 1992, but
expensed in 1993 and 1994 (which amortization is now completed).
Research and Development. Research and development expenses were $291,075
for the first half of 1996 and $351,826 for the first half of 1995. Lower 1996
expenses were the result of cost cutting measures enacted in mid-1995 and
completion of development of the ACS product. Research and development expenses
of $826,984 for the year ended December 31, 1995, and $830,913 for the
comparable period in 1994, were associated primarily with design and development
of ACS and MLD. Research and development expenses for 1993 were $37,955,
compared to $9,317 for 1992. The increase in years 1994 and 1995 was primarily
due to creation of a full-scale research and development division, Telegen
Laboratories.
Sales and Marketing. Sales and marketing expenses for the first half of
1996 were $5,249 compared to $62,088 for the comparable period in 1995. The
reduced expenses were the result of a reduction in marketing staff in 1995, the
elimination of trade show activity for the first half of 1996 and concentration
on contract negotiations with long distance carriers, which expenses have been
classified as general and administrative expenses. Sales and marketing expenses
for the year ended December 31, 1995, were $84,467, compared to $92,170 for the
comparable period in 1994, the decrease attributable largely to a reduction in
the marketing staff in mid-1995. Sales and marketing expenses were $92,170 in
1994, $29,980 in 1993, and $11,007 in 1992. The increase from 1993 to 1994 was
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 the
first half of 1996 were $994,033 compared with $483,823 for the same period in
1995. The increased costs were primarily associated with legal and consulting
fees related to patent activity and costs associated with the amortization of
bridge loan expenses. General and administrative expenses for the year ended
December 31, 1995, were $1,501,469, compared to $1,118,312 for the comparable
period in 1994. The primary components of general and administrative expenses
were employee salaries and legal and accounting expenses for both periods.
General and administrative expenses were $1,118,312 for the full year 1994, as
compared with $294,526 for 1993, and $103,277 for 1992, due to expanded office
quarters and significant staff increases. General and administrative expenses
for 1992 were $103,277, compared to $402,506 in 1991, a decrease of $299,229
Interest Income and Expense. Net interest expense for the first half of
1996 was $159,458 compared with $8,631 for the first half of 1995. The increased
expense for 1996 was the direct result of bridge loan interest expense; the
bridge loans were paid off in May 1996 from the proceeds of a private placement
completed in April 1996. Net interest expense for the year ended December 31,
1995 was $80,380, compared to $21,050 for the comparable period in 1994.
Interest income for the year ended December 31, 1994, was $9,608, compared to
$3,154 in 1993. Interest expense for 1994 was $30,658, compared to $11,488 for
1993, and $13,433 in 1992. The increase was primarily 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 June 30, 1996, Telegen
had raised a total of $13,577,632 in net capital through the sale of common
stock, $922,526 of net capital through the sale of Series A preferred stock and
$558,373 through the placement of debt securities. 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 $6,672,250 for the issuance of 1,334,450 shares
of common stock and paid approximately $1,000,837 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.
Due to the unavailability of cash resources for operations, Telegen issued
118,252 shares of common stock and common stock equivalents and 52,865 shares of
common stock during 1995 and 1994, respectively, in lieu of cash as payment for
certain operating expenses, primarily legal fees and employees services,
amounting to $536,964 and $209,219, respectively. During the six-month periods
ended June 30, 1996 and June 30, 1995, Telegen issued 23,240 shares of common
stock and 16,124 shares of common stock, respectively, in lieu of cash as
payment for legal fees and other additional services amounting to $100,498 and
$82,618, respectively. In July 1996, Telegen issued 11,933 shares of common
stock and 4,000 shares of common stock in lieu of cash as payment for legal and
employee services valued at $58,865, and equipment valued at $60,000,
respectively. Over $25,000 of the amount issued for services represents the
retirement of payables arising from services rendered during prior periods.
In 1994, Telegen purchased various office equipment items to establish its
general administrative offices at an aggregate cost of approximately $117,125.
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 royalities 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 $30 million for equipment, $10 million in plant infrastructure
plus working capital of about $30 million, or a total of about $70 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 currently estimated that
a full scale production plant could not be completed and producing significant
numbers of flat panel displays before the end of 1997.
However, Telegen is currently contemplating entering into license
agreements with a number of large, capital rich 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 enhancing the
market's prospectus of enthusiastically purchasing the product. This would
eliminate any real requirements for additional capital by Telegen since these
other, large manufacturers would provide all of the capital required to get the
displays into the marketplace. 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
1997. The cost of that production line is estimated to be about $2,333,000,
which funds are currently in hand. Telegen believes that it does not require any
additional funds to proceed to positive income and cash flow.
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 and revenues from operations will be adequate to meet
Telegen's forecasts through 1996. 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 $2.3 million, of which $100,000
has already been spent and approximately $50,000 is currently legally commited,
even though Telegen's management contemplates spending the entire amount by the
end of August 1996.
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 the next twelve months. 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
$3,000,000 during the 12 months following consummation of the Acquisition.
Telegen estimates that its total expenditures for sales and marketing will
aggregate over $1,000,000 during the 12 months following consummation of the
Acquisition. All such funds outlined above are presently available to Telegen.
Telegen Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Telegen has not experienced a change in its independent accountants during
its three most recent fiscal years or subsequent interim period. Further,
Telegen has not had any disagreements with its independent accountants on any
matter of accounting principles or practices or financial disclosure.
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 July 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.
<TABLE>
<CAPTION>
Amount Percentage
Beneficially Beneficially
Name Position Owned(2) Owned(1)(2)
<S> <C> <C> <C>
Jessica L. Stevens President, Chief Executive 1,321,137 28.7%
Officer and Director
Bonnie A. Crystal Executive Vice President, 366,400 7.9%
Secretary and Director
Warren M. Dillard Chief Operating Officer, Chief 192,231 4.2%
Financial Officer and Director
Frederick T. Lezak, Jr. Director 60,733 1.4%
James R. Iverson Director 12,623 0.3%
Larry J. Wells(3) Director 206,867 4.6%
All directors and executive
officers as a group
(6 persons) 2,159,991 43.5%
<FN>
(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 July 22, 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 July 31, 1996, Telegen had 4,433,455 shares of common stock, and
112,750 shares of Series A preferred stock outstanding. The number of
common shares outstanding excludes 208,592 shares of common stock cancelled
for lack of consideration. See "Telegen - Legal Proceedings." As of July
22, 1996, Ms. Stevens, Ms. Crystal and Messrs. Dillard, Lezak, Iverson and
Wells had the right to acquire within 60 days, from outstanding options,
88,341 shares, 179,500 shares, 169,059 shares, 8,733 shares, 8,333 shares
and 6,867 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.
</FN>
</TABLE>
Management of Telegen
The following information is presented with respect to the current
directors and executive officers of Telegen who, pursuant to the terms of the
Agreement, will serve as directors and executive officers of SERC, the acquiring
corporation, upon consummation of the Acquisition.
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.
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 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.
Executive Compensation
The following information is presented with respect to the current
directors and executive officers of Telegen who, pursuant to the terms of the
Agreement, will serve as directors and executive officers of SERC, the acquiring
corporation, upon consummation of the Acquisition:
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h)
Other
Name Annual Restricted Securities All Other
and Compen- Stock Underlying LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($) ($) ($) SAR's(#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jessica L. 1995 $29,167 $ - $ 252,000 (1) $ - 20,004 $ - $ -
Stevens, 1994 $20,833 $ - $ - $ - 63,336 $ - $ -
President, 1993 $ - $ - $ - $ - - $ - $ -
Chief Executive Officer
and Director
Bonnie A. 1995 $60,000 $ - $ - $ - 18,000 $ - $ -
Crystal, 1994 $71,260 $ - $ - $ - 57,000 $ - $ -
Executive 1993 $ - $ - $ - $ - - $ - $ -
Vice President,
Secretary and
Director
Warren M.. 1995 $53,333 $ - $ - $ - 15,996 $ - $ -
Dillard, 1994 $63,333 $ - $ - $ - 49,064 $ - $ -
Chief 1993 $ - $ - $ - $ - - $ - $ -
Operating
Officer, Chief
Financial Officer
and Director
<FN>
(1) In August 1995, Jessica L. Stevens was issued warrants to purchase
50,500 shares of Telegen common stock for $.01 per share for a period of five
years. The warrants can be exercised at any time. Compensation expense of
approximately $252,000 was recorded to reflect the difference between the fair
value of the common stock and the exercise price.
</FN>
</TABLE>
Option/SAR Grants in Last Fiscal Year
Individual Grants
- --------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base Expiration
Name Granted (#) Fiscal Year Price ($/SH) Date
- --------------------------------------------------------------------------------
Jessica L. Stevens 20,004 8.6% $5.00 2000
Bonnie A. Crystal 18,000 7.8% $5.00 2000
Warren M. Dillard 15,996 6.9% $5.00 2000
Aggregated Options/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying In-the-Money
Unexercised Options/SARs
Options/SARs at FY-End ($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
- --------------------------------------------------------------------------------
Jessica L. Stevens $ - $ - 83,340/0 $0/$0
Bonnie A. Crystal $ - $ - 75,000/0 $0/$0
Warren M. Dillard $ - $ - 65,060/0 $0/$0
Certain Transactions with Management and Others
The following information is presented with respect to the current
directors and executive officers of Telegen, who, pursuant to the terms of the
Agreement, will serve as directors and executive officers of SERC, the acquiring
corporation, upon consummation of the Acquisition:
Telegen has entered into agreements with each of its full-time employees
(including its executive officers) that prohibit disclosure of confidential
information to anyone outside of Telegen both during and subsequent to
employment and require disclosure and assignment to Telegen of all proprietary
rights to any ideas, discoveries or inventions relating to or resulting from the
employee's work for Telegen.
In order to preserve the cash resources of Telegen, Jessica L. Stevens,
Bonnie A. Crystal and Warren M. Dillard have accepted Telegen stock options in
connection with their agreement to accept reduced salary compensation.
Telegen was advanced funds by Jessica L. Stevens in 1991 and 1992. The
outstanding balance as of December 31, 1995 was $167,649. A note was issued to
Ms. Stevens for such amount bearing interest at 8% per annum. The note remains
unpaid.
In August 1995, Jessica L. Stevens was issued warrants to purchase 50,500
shares of Telegen 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 late 1993, Telegen purchased furnishings and art work from Warren M.
Dillard for 2,800 shares of Telegen common stock, then valued at $14,000.
Mr. Frederick T. Lezak, Jr., a director of Telegen, is a principal of
SynerNet, Inc., a marketer and distributor of telecommunications products and
services, including products manufactured and sold by Telegen. During the last
12 months, SynerNet has purchased approximately $30,000 of such products on
terms and conditions no more favorable than those granted to other such
distributors.
Mr. W. Edward Naugler, Jr., Executive Vice-President and director of
Telegen Display Laboratories, Inc. ("TDL"), was granted a five-year option in
May 1996 to purchase 5% of the capital stock of TDL, adjusted for TDL's initial
financial capitalization, for $5,000.
Mr. Larry Wells is Chairman of the Board of Anderson & Wells, a private
venture fund management organization, which purchased 200,000 shares of
Telegen's common stock in March 1996 for $1,000,000.
Market for Telegen Securities and Related Stockholder Matters
No public market exists for the securities of Telegen. Telegen has never
paid any cash dividends on its common stock, intends to retain any future
earnings to fund the development of its business and therefore does not
anticipate paying any cash dividends in the foreseeable future.
Legal Proceedings
In August 1991, Telegen 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 Telegen. A letter of credit in
the amount of $300,000 was issued in favor of Telegen by Bank Sadarat but
Telegen was unable to realize any benefit from such a letter of credit. In
September 1992, Bank Sadarat filed a complaint against Telegen 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, Telegen
cancelled the 208,592 shares issued to Sahara and filed a cross-complaint for
declaratory relief against Sahara and others. In that action, Telegen sought a
judicial declaration that the issuance of the aforementioned shares was void for
lack of consideration, that the action of Telegen in cancelling such shares was
valid and that the persons to whom such shares were issued have no rights as
shareholders of Telegen. The case was removed to the Federal District Court for
the Northern District of California. In July 1996, Telegen 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 Telegen's Financial
Statements included elsewhere herein. The dispute with Sahara regarding the
cancelled shares has not yet been resolved. The number of shares and percentages
of the outstanding shares referred to in this Registration Statement reflect the
cancellation of the 208,592 shares issued to Sahara. Although Telegen management
currently believes that the reissuance of 208,592 shares to Sahara would not
have a material adverse effect on the financial condition or operations of
Telegen, there can be no assurance as to the ultimate result of the litigation
with Sahara.
On July 11, 1995, Rates Technology, Inc. a Delaware corporation ("Rates"),
filed suit against Telegen in the United States District Court for the Southern
District of New York, alleging infringement by Telegen of a patent held by Rates
relating to "least cost" call routing. Rates sought in its complaint unspecified
damages estimated by Rates to be in excess of $50,000, the trebling of such
damages, and injunctive relief with respect to the alleged patent infringements.
Telegen denied the claims of Rates on the grounds that the patent sued upon
was invalid. In addition, Telegen challenged the personal jurisdiction of the
Court over Telegen. Prior to the Court ruling on jurisdictional issue, Rates
requested Telegen's concurrence to its unconditional voluntary dismissal of the
lawsuit. Telegen ultimately did stipulate to Rates' requested withdrawal of the
suit and the entire litigation was dismissed, without prejudice, on June 3,
1996. However, there can be no assurance that Rates wil not seek to revive this
action at some future date.
LEGAL MATTERS
An opinion as to the validity of the securities of SERC to be issued in
connection with the Acquisition has been given for SERC by the firm of Cohen
Brame & Smith Professional Corporation, 1700 Lincoln Street, Suite 1800, Denver,
Colorado 80203. SERC has issued 10,000 shares of its common stock to Cohen Brame
& Smith Professional Corporation for services rendered in connection with the
Acquisition.
The firm of Wilson, Sonsini, Goodrich & Rosati, Professional Corporation
has rendered legal services in connection with certain issues related to the
Acquisition.
EXPERTS
The financial statements included in this Prospectus to the extent and for
the periods indicated in their reports, have been included herein in reliance on
the report for SERC by Cordovano and Company, P.C. (whose report contained an
explanatory paragraph indicating substantial doubt about SERC's ability to
continue as a going concern); and for Telegen by Coopers & Lybrand L.L.P.,
Independent Accountants, given on the authority of such firms as experts in
accounting and auditing.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Unaudited Pro Forma Condensed Balance Sheet, June 30, 1996
Unaudited Pro Forma Condensed Statements of Operations, Year Ended
December 31, 1995 and for the Six-Month Period Ended June 30, 1996
Solar Energy Research Corp.
Independent Auditors' Report
Consolidated Statement of Operations, for the Years Ended December 31,
1995, 1994, and for the Period from January 1, 1992 (Inception) Through
December 31, 1995
Consolidated Balance Sheet at December 31, 1995
Consolidated Statement of Cash Flows for the Years Ended December 31,
1995, 1994, and for the Period from January 1, 1992 (Inception) Through
December 31, 1995
Consolidated Statement of Changes in Stockholders' Equity, for the Years
Ended December 31, 1995, 1994, and for the Period from January 1,
1992 (Inception) Through December 31, 1995
Notes to Consolidated Financial Statements, December 31, 1995
Consolidated, Condensed Balance Sheets as of June 30, 1996 and
December 31, 1995 (Unaudited)
Consolidated, Condensed Statements of Operations for the Six-Month
Periods Ended June 30, 1996 and June 30, 1995 and from January 1, 1992
(Inception) Through June 30, 1996 (Unaudited)
Consolidated, Condensed Statements of Cash Flows for the Six-Month
Periods Ended June 30, 1996 and June 30, 1995 and from January 1, 1992
(Inception) Through June 30, 1996 (Unaudited)
Notes to Consolidated, Condensed Financial Statements, June 30, 1996
Telegen Corporation
Report of Independent Certified Public Accountants
Balance Sheets as of December 31, 1995 and 1994
Statements of Operations for the Years Ended December 31,
1995 and 1994
Statements of Changes in Stockholders' Equity (Deficit) for the Years
Ended December 31, 1995 and 1994
Statements of Cash Flows for the Years Ended December 31,
1995 and 1994
Notes to Financial Statements
Balance Sheet as of June 30, 1996 (Unaudited)
Statement of Operations for the Six-Month Periods Ended June 30,
1996 and June 30, 1995 (Unaudited)
Statement of Cash Flows for the Six-Month Periods Ended June 30,
1996 and June 30, 1995 (Unaudited)
Note to Financial Statements (Unaudited)
<PAGE>
<TABLE>
<CAPTION>
Telegen Corporation (NEWCO)
Pro Forma Condensed Balance Sheet
June 30, 1996
(Unaudited)
Historical Pro forma
Solar Energy Telegen
Telegen Research (NEW CO)
Corporation Corp. Adjustments Corporation
<S> <C> <C> <C> <C>
Cash $ 7,895,577 $ 633 - $ 7,896,210
Accounts receivable, trade 4,998 - - 4,998
Accounts receivable, other 24,545 40,000 $ (40,000) A 24,545
Inventory 334,031 - - 334,031
Prepaid & other current assets - 915 - 915
---------- ------- ------ ---------
Total current assets 8,259,151 41,548 (40,000) 8,260,699
Deferred financing cost, net - - - -
Property and equipment, net 231,078 - - 231,078
Other assets 63,496 - - 63,496
---------- ------- ------ ---------
Total assets $ 8,553,725 $ 41,548 $ (40,000) $ 8,555,273
---------- ------- ------ ---------
Current Liabilities
Current maturities of notes payable $ 334,666 - - $ 334,666
Current maturities of notes payable
-shareholder - - - -
Accounts payable, trade 199,942 $ 1,574 - 201,516
Accounts payable, other - - - -
Accrued expenses 267,767 25,222 - 292,989
---------- ------- ------ ---------
Total current liabilities 802,375 26,796 - 829,171
Note payable-shareholder, long-term - - - -
---------- ------- ------ ---------
Total liabilities 802,375 26,796 - 829,171
Shareholders' equity (deficit)
Series A convertible preferred stock, 922,526 - - 922,526
Common stock 13,577,632 713,798 $ (699,046) B 13,592,384
Additional paid in capital - 954,061 (954,061) B -
Accumulated deficit (6,748,808) (1,653,107) 1,613,107 B (6,788,808)
---------- ------- ------ ---------
Total shareholders' equity
(deficit) 7,751,350 14,752 (40,000) 7,726,102
---------- ------- ------ ---------
Total liabilities and shareholders'
deficit $ 8,553,725 $ 41,548 $ (40,000) $ 8,555,273
---------- ------- ------ ---------
The accompanying notes are an integral part of these pro forma financial statements.
<PAGE>
Telegen Corporation (NEWCO)
Pro Forma Condensed Statement of Operations
for the year ended December 31, 1995
(Unaudited)
<CAPTION>
Historical Pro forma
Solar Energy Telegen
Telegen Research (NEW CO)
Corporation Corp. Adjustments Corporation
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ 145,795 - - $ 145,795
Cost of goods sold (170,421) - - (170,421)
-------------- ------------ ---------- ------------
Gross profit (loss) (24,626) - - (24,626)
Operating expenses
Selling and marketing 84,467 - - 84,467
Research and development 826,984 - - 826,984
General and administrative 1,501,469 $ 33,301 $ (33,301) C 1,501,469
General and administrative-related party - 46,872 (46,872) C -
-------------- ------------ ---------- ------------
Loss from operations (2,437,546) (80,173) 80,173 (2,437,546)
Other income/(expense)
Interest income 725 - - 725
Interest expense (81,105) (1,556) - (82,661)
-------------- ------------ ---------- ------------
Net loss $ (2,517,926) $ (81,729) $ 80,173 $ (2,519,482)
-------------- ------------ ---------- ------------
Weighted average shares outstanding 2,652,718 1,070,725 2,800,404
------------- ------------ ------------
Net loss per common and common
equivalent share $ (0.95) $ (0.08) $ (0.90)
------------- ------------ ------------
The accompanying notes are an integral part of these pro forma financial statements.
<PAGE>
<CAPTION>
Telegen Corporation (NEWCO)
Pro Forma Condensed Statement of Operations
for the six-month period ended June 30, 1996
(Unaudited)
Historical Pro forma
Solar Energy Telegen
Telegen Research (NEW CO)
Corporation Corp. Adjustments Corporation
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ 14,945 - - $ 14,945
Cost of goods sold (12,082) - - (12,082)
---------- ------- ------ ---------
Gross profit (loss) 2,863 - - 2,863
Operating expenses
Selling and marketing 5,249 - - 5,249
Research and development 291,075 - - 291,075
Proposed merger costs - $ 63,213 $ (63,213) C -
General and administrative 994,033 17,154 (17,154) C 994,033
General and administrative-related party - 7,500 (7,500) C -
---------- ------- ------ ---------
Loss from operations (1,287,494) (87,867) 87,867 (1,287,494)
Other income/(expense)
Interest income 55,608 - - 55,608
Interest expense (215,066) (902) - (215,968)
---------- ------- ------ ---------
Net loss $ (1,446,952) $ (88,769) $ 87,867 (1,447,854)
Weighted average shares outstanding 3,941,693 1,334,265 4,125,730
---------- ------- ------ ---------
Net loss per common and common
equivalent share $ (0.37) (0.07) $ (0.35)
---------- ------- ------ ---------
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
<PAGE>
TELEGEN CORPORATION (NEW CO)
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS,
for the year ended December 31, 1995
and the six-month period ended June 30, 1996
(Unaudited)
1. Organization and Basis of Presentation:
Solar Energy Research Corp. (SERC) intends to file a registration statement
on Form S-4 with the Securities and Exchange Commission with respect to the
acquisition of all outstanding capital stock of Telegen Corporation (Telegen) by
Telegen Acquisition Company (TAC), a wholly owned subsidiary of SERC, through a
merger of TAC with and into Telegen. Telegen will thereby become a wholly owned
subsidiary of SERC. Effective upon closing, SERC (i) will issue one share of its
common stock (after giving effect to the 7.25 to 1 reverse split of the
currently issued and outstanding SERC common stock) for each share of Telegen
common stock issued and outstanding at closing; (ii) will issue one share of
Class A preferred stock for each share of Telegen preferred stock issued and
outstanding at closing; and (iii) will issue one option to acquire a share of
SERC's common stock in exchange for each outstanding option to acquire Telegen
common stock.
The acquisition has been treated as a recapitalization of Telegen with
Telegen as the acquirer (reverse acquisition). The pro forma financial
statements of Telegen Corporation (New Co) have been prepared based on the
historical financial statements of Telegen considering the effects of the
Agreement and Plan of Reorganization transactions. The pro forma balance sheet
of the New Co. at June 30, 1996 has been prepared as if the acquisition and the
reorganization transactions had been consummated at June 30, 1996. The pro forma
income statement for the year ended December 31, 1995 and the six-month period
ended June 30, 1996 has been prepared as if the acquisition and the
reorganization transactions had been consummated at January 1, 1995 and January
1, 1996, respectively. The pro forma financial statements should be read in
conjunction with the historical financial statements, and related notes thereto,
of SERC and of Telegen included elsewhere herein.
The computation of the pro forma primary loss per common share is based
upon the weighted average number of outstanding common shares for the year ended
December 31, 1995 and for the period ended June 30, 1996 and excludes the
anti-dilutive effect of contingent shares issuable upon the exercise of stock
options, stock warrants and other contingent shares related to the price
protection provisions. For the year ended December 31, 1995 and the period ended
June 30, 1996, the pro forma fully diluted loss per common share is considered
to be the same as the pro forma primary loss per common share since the effect
of the common stock equivalents and any contingent shares associated with the
price protection provisions would be anti-dilutive.
The unaudited pro forma financial statements are not necessarily indicative
of what the actual financial position would have been at June 30, 1996, nor of
the actual results of operations for the year ended December 31, 1995 or the
six-month period ended June 30, 1996, had the acquisition and the reorganization
transactions occurred on June 30, 1996, January 1, 1995 and January 1, 1996,
respectively, nor does it purport to present the future financial position or
results of operations of the New Co.
2. Assumptions:
Certain assumptions regarding the operations of the New Co. have been made
in connection with the preparation of the pro forma financial statements. Those
assumptions are as follows:
(a) Pro forma net income per share information for the year ended December
31, 1995 is calculated using weighted average shares outstanding of 147,686
shares for SERC (after giving effect to the 7.25 to 1 reverse split of the SERC
outstanding common stock) prior to the merger plus the weighted average shares
outstanding of 2,652,718 shares for Telegen.
(b) Pro forma net income per share information for the six-month period
ended June 30, 1996 is calculated using weighted average shares outstanding of
184,037 shares for SERC (after giving effect to the 7.25 to 1 reverse split of
the SERC outstanding common stock) prior to the merger plus the weighted average
shares outstanding of 3,941,693 shares for Telegen.
(c) The New Co. anticipates that the reorganization will qualify as a tax
free reorganization under Section 368(a)(1)(B) of the Internal Revenue Code.
SERC anticipates limitation of the use of its tax net operating loss
carryforwards as a result of a change in ownership as defined in Section 382 of
the Internal Revenue Code. SERC and Telegen can utilize their existing net
operating loss carryforwards, subject to the limitation on SERC set out above,
on future taxable income generated by their respective companies.
The New Co. will provide a full valuation allowance against its deferred
tax asset due to the uncertainty of its realization. The deferred tax asset is
primarily attributable to approximately $3.2 million in net operating loss
carryforwards expiring from 1998 through 2010.
3. The Pro Forma Adjustments:
(A) Elimination of the deferred merger costs as part of the purchase price
of Telegen.
(B) Elimination of SERC common stock, additional paid-in capital and
stockholders' deficit. The elimination of SERC common stock is offset by SERC's
net assets (pre acquisition) of $27,148 and $14,752 at December 31, 1995 and
June 30, 1996, respectively, and the elimination of SERC's accumulated deficit
is offset by SERC's prepaid acquisition costs of $40,000 (post acquisition) at
December 31, 1995 and June 30, 1996.
(C) Reflects the elimination of expenses incurred by SERC due to the
Agreement and Plan of Reorganization. SERC's offices will be relocated to the
office location of Telegen.
4. Subsequent Events:
In July 1996, Telegen received $58,865 in legal and employee services and
equipment valued at $60,000 in exchange for 11,933 shares and 4,000 shares of
its common stock, respectively.
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
with
INDEPENDENT AUDITORS' REPORT
December 31, 1995
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
Index to Consolidated Financial Statements
Independent auditors' report
Consolidated balance sheet as of December 31, 1995
Consolidated statements of operations, for the years ended
December 31, 1995 and 1994 and from January 1, 1992
(inception) through December 31, 1995
Consolidated statements of cash flows, for the years ended
December 31, 1995 and 1994 and from January 1, 1992
(inception) through December 31, 1995.
Consolidated statements of shareholders' equity,
January 1, 1992 (inception) through December 31, 1995
Summary of significant accounting policies
Notes to consolidated financial statements
<PAGE>
Board of Directors
Solar Energy Research Corp. and subsidiary
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheet of Solar Energy
Research Corp. and subsidiary (a development stage company) as of December 31,
1995, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the years ended December 31, 1995 and 1994 and from
January 1, 1992 (inception of development stage) through December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Solar Energy
Research Corp. and subsidiary as of December 31, 1995 and the results of its
operations and its cash flows for the years ended December 31, 1995 and 1994 and
from January 1, 1992 through December 31, 1995, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
H to the consolidated financial statements, the Company has no operations as of
December 31, 1995 and the Company's operating losses since inception raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note H. The consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
Cordovano and Company, P.C.
Denver, Colorado
January 22, 1996
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
December 31, 1995
ASSETS
CURRENT ASSETS
Cash................................................. $ 12,509
Advances to merger candidate......................... 40,000
---------
TOTAL CURRENT ASSETS............................... 52,509
OTHER ASSETS
Organization costs................................... 915
Deferred offering costs.............................. 500
---------
$ 53,924
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable..................................... $ 4,228
Judgments payable (Note C)........................... 17,997
Accrued interest payable on judgments................ 4,551
---------
TOTAL CURRENT LIABILITIES.......................... 26,776
---------
COMMITMENT AND CONTINGENCY (Note F).................... -
SHAREHOLDERS' EQUITY (Note D)
Preferred stock, 25,000,000 shares authorized,
no par value; no shares outstanding......... -
Common stock, 100,000,000 shares
authorized,
$.50 par value; 1,273,850 shares issued and
outstanding........................................ 636,925
Additional paid-in capital....................... 954,061
Accumulated retained deficit, ($221,170
accumulated during development stage)................ (1,563,838)
---------
TOTAL SHAREHOLDERS' EQUITY........................ 27,148
---------
$ 53,924
=========
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
January 1, 1992
(inception)
Through
Years Ended December 31, December 31,
1995 1994 1995
COSTS AND EXPENSES
General and administrative,
Related parties (Note B). $ 46,872 $ 42,462 $ 129,834
General and administrative. 33,301 6,760 86,470
Interest expense........... 1,556 1,555 4,551
NET LOSS................ $(81,729) $(50,777) $(220,855)
_________ _________ __________
WEIGHTED AVERAGE SHARES
OUTSTANDING................ 1,070,725 908,195 405,662
___________ ___________ ____________
NET LOSS PER SHARE........... $ (0.08) $ (0.06) $ (0.54)
___________ ___________ ____________
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
January 1, 1992
(inception)
Through
Years Ended December 31, December 31,
1995 1994 1995
OPERATING ACTIVITIES
NET LOSS.. $ (81,729) $ (50,777) $ (220,855)
Expenses not requiring cash
Shares issued for
services, (Note B)..... 11,250 15,000 66,750
Shares issued for
compensation (Note B).. 26,250 35,000 104,250
___________ ___________ ____________
(44,229) (777) (49,855)
Changes in current assets and
liabilities
Advances to merger
candidate and other
current assets......... (41,415) - (41,415)
Accounts and interest
payable................ 3,153 777 8,779
___________ ___________ ____________
Cash used in operating
activities........... (82,491) - (82,491)
___________ ___________ ____________
FINANCING ACTIVITIES
Sale of common stock....... 95,000 - 95,000
___________ ___________ ____________
Cash provided by
financing activities.. 95,000 - 95,000
___________ ___________ ____________
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS.. 12,509 - 12,509
Cash and cash equivalents at
beginning of period........ - - -
___________ ___________ ____________
CASH AND CASH EQUIVALENTS AT
END OF PERIOD.............. $ 12,509 $ - $ 12,509
___________ ___________ ____________
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONCLUDED
January 1, 1992
(inception)
Through
Years Ended December 31, December 31,
1995 1994 1995
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................. $ - $ - $ -
Income taxes............. $ - $ - $ -
NONCASH FINANCING ACTIVITIES
Shares issued to the
president of the Company
in exchange for debt
(Note B)............... $ - $ - $ 40,018
Shares issued to related
parties in exchange for
debt (Note B).......... $ - $ - $ 558,206
Shares issued to judgment
creditors in exchange
for satisfaction of
judgment................ $ - $ - $ 21,815
Shares issued for
services (Note B)...... $ 11,250 $ 15,000 $ 66,750
Shares issued for
compensation:
President (Note B)... $ 26,250 $ 35,000 $ 102,750
Secretary (Note B)... $ - $ - $ 1,500
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
January 1, 1992 (inception) through December 31, 1995
Preferred Additional
Stock Common Stock Paid-in Accumulated
Shares Shares Par Value Capital Deficit Total
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1992............... - 328,944 $ 164,472 $ 540,475 $(1,342,983) $(638,036)
Shares issued in exchange
for judgment debt, July 13, 1992....... - 3,445 1,722 3,274 - 4,996
Shares issued to related parties for
debt, September 10, 1992 (Note B).. - 372,137 186,069 372,137 558,206
Shares issued in exchange
for judgment debt, September 18, 1992 - 8,800 4,400 8,788 13,188
Shares issued in exchange
for judgment debt, December 15, 1992. - 2,500 1,250 2,381 - 3,631
Shares issued to president of Company
December 31, 1992(Note B)........... - 26,679 13,340 26,678 - 40,018
Shares issued to an affiliate
December 31, 1992 (Note B)........... - 25,345 12,672 328 - 13,000
Net loss............................. - - - - (13,839) (13,839)
-------- ------- ------- ------- ---------- -------
BALANCE AT DECEMBER 31, 1992......... - 767,850 383,925 954,061 (1,356,822) (18,836)
Shares issued to an affiliate
December 31, 1993 (Note B)........... - 55,000 27,500 - - 27,500
Shares issued to the president of the
Company, December 31, 1993 (Note B).. - 83,000 41,500 - - 41,500
Shares issued to an officer December
31, 1993 (Note B).................... - 3,000 1,500 - - 1,500
Net loss............................. - - - - (74,510) (74,510)
-------- ------- ------- ------- ---------- -------
BALANCE AT DECEMBER 31, 1993......... - 908,850 454,425 954,061 (1,431,332) (22,846)
Shares issued to an affiliate December
27, 1994 (Note B).................... - 30,000 15,000 - - 15,000
Shares issued to the president of the
Company, December 27, 1994 (Note B).. - 70,000 35,000 - - 35,000
Net loss............................... - - - - (50,777) (50,777)
-------- ------- ------- ------- ---------- -------
BALANCE AT DECEMBER 31,1994............ - 1,008,850 504,425 954,061 (1,482,109) (23,623)
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
SOLAR ENERGY RESEARCH CORP. AND
SUBSIDIARY (A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY, CONTINUED
January 1, 1992 (Inception) through December 31, 1995
Preferred Additional
Stock Common Stock Paid-in Accumulated
Shares Shares Par Value Capital Deficit Total
<S> <C> <C> <C> <C> <C> <C>
Shares issued to an affiliate
May 26, 1995 (Note B)................. - 15,000 7,500 - - 7,500
Shares issued to president of the
Company, May 26, 1995 (Note B)........ - 35,000 17,500 - - 17,500
Shares issued for cash
September 30, 1995................... - 50,000 25,000 - - 25,000
Shares issued for cash
October 3, 1995...................... - 50,000 25,000 - - 25,000
Shares issued for cash
October 20, 1995..................... - 20,000 10,000 - - 10,000
Shares issued for cash
November 30, 1995.................... - 10,000 5,000 - - 5,000
Shares issued for cash
December 16, 1995.................... - 10,000 5,000 - - 5,000
Shares issued for cash
December 27, 1995.................... - 20,000 10,000 - - 10,000
Shares issued for cash
December 28, 1995.................... - 30,000 15,000 - - 15,000
Shares issued to an affiliate
December 31, 1995 (Note B)........... - 7,500 3,750 - - 3,750
Shares issued to the president of the
Company, December 31, 1995 (Note B).. - 17,500 8,750 - - 8,750
Net loss.............................. - - - - (81,729) (81,729)
_________ ___________ ____________ _________ ____________ _________
BALANCE AT DECEMBER 31, 1995......... - 1,273,850 $ 636,925 $ 954,061 $(1,563,838) $ 27,148
_________ ___________ ____________ _________ ____________ _________
</TABLE>
All share amounts restated for stock split (See Note D)
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY)
Summary of Significant Accounting Policies
December 31, 1995
Basis of presentation
The accompanying consolidated financial statements include the transactions
of Solar Energy Research Corp. and Telegen Acquisitions, Inc., a wholly owned
subsidiary of Solar Energy Research Corp. All material intercompany transactions
have been eliminated in the accompanying financial statements.
Development stage company
The Company entered the development stage in accordance with SFAS No. 7 on
January 1, 1992 and its purpose is to evaluate, structure and complete a merger
with, or acquisition of a privately owned corporation.
Cash equivalents
For financial accounting purposes and the statement of cash flows, cash
equivalents include time deposits, certificates of deposit, and all highly
liquid debt instruments with original maturities of three months or less.
Net loss per share
Net loss per share is based on the weighted average number of common shares
outstanding for the periods presented according to the rules of the Securities
and Exchange Commission. Such rules require that any shares sold at a nominal
value prior to a public offering, should be considered outstanding for all
periods presented.
Organization costs
Costs incurred in connection with the organization of a subsidiary company
will be amortized over 60 months once the subsidiary has commenced operations.
Deferred offering costs
Offering costs, consisting of legal fees, are deferred until completion of
the Company's private placement offering. Upon completion, the deferred offering
costs will be offset against the proceeds from the offering.
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
Notes To Consolidated Financial Statements
December 31, 1995
Note A: Nature of organization
Solar Energy Research Corp. and subsidiary (the Company) was incorporated
under the laws of Colorado on December 19, 1973, for the purposes of designing,
marketing and serving solar heating systems. Effective December 31, 1981, the
Company began to wind down operations and from shortly after that date through
December 31, 1991, the Company was inactive. Effective January 1, 1992, the
Company returned to the development stage in accordance with SFAS No. 7.
Principal activities since December 31, 1991 include organizational matters and
the restructuring of debt relative to the discontinued solar energy operations.
Currently, the Company is a "shell corporation" and is seeking financing to
complete a merger with a privately owned company.
Note B: Related party transactions
The Company utilized office space on a rent-free basis from the president
during all periods presented. The Company does not anticipate changing this
arrangement until the Company's operations have commenced.
Since the Company re-entered the development stage in 1992, it has issued
232,179 shares of its $0.50 par value common stock to the president of the
Company for compensation valued at $142,768.
Since the Company re-entered the development stage in 1992, certain
expenses in connection with a search for a merger candidate have been paid by an
affiliate of the Company. Since 1992, the Company issued 130,845 shares of its
common stock for expenses totalling $66,750.
In 1993, the Company issued 3,000 shares of its $0.50 par value common
stock to an officer of the Company for compensation valued at $1,500.
In 1992, the Company exchanged indebtedness, including accrued interest
through 1985, to various officers and shareholders totalling $372,137 for
558,206 shares of its $0.50 par value common stock.
In 1985, the Company liquidated debt to the president of the Company
totalling $6,452, including accrued interest, from the proceeds of the sale of
equipment.
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
Notes To Consolidated Financial Statements, Continued
December 31, 1995
Note C: Judgments payable
Outstanding judgments at December 31, 1995, resulting from trade payables,
are as follows:
No. 80002014........................... $ 1,123
No. 80005430........................... 2,962
No. 80002837........................... 895
No. 80004601........................... 6,417
No. 81008312 less
amount forgiven by creditor.......... 6,600
_______
$17,997
_______
Note D: Shareholders' equity
Effective October 23, 1993, the Board of Directors declared a 1 for 50
reverse stock split. All common shares reflected in the accompanying
consolidated financial statements have been restated.
Shareholders have authorized a class of no par value, voting preferred
stock. Series may be established by action of the Board of Directors designating
dividend conversion, liquidation and redemption rights and privileges. No voting
preferred shares have been issued.
Beginning on September 28, 1995, the Company offered for sale 200,000
shares of $.50 par value common stock in a private placement offering at a price
of $.50 per share. Proceeds from the offering will be used to pay the costs of
acquisition of a privately held company. Anticipated costs include attorneys'
and accountants' fees as well as registration filing costs. Should the
acquisition be terminated, any remaining proceeds will be deposited to the
Company's general account to be used for future transactional expenses and
working capital.
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
Notes To Consolidated Financial Statements, Continued
December 31, 1995
Note E: Income taxes
At December 31, 1994, deferred taxes consisted of:
December 31,
1995 1994
Deferred tax asset, net
operating loss carryforward ... $ 509,804 $ 490,941
Valuation allowance ............. (509,804) (490,941)
___________ ___________
Net deferred taxes .............. $ - $ -
___________ ___________
The valuation allowance offsets the net deferred tax asset for which there
is no assurance of recovery.
The Company has available, as of December 31, 1995, unused operating loss
carryforwards for Federal and State purposes of approximately $1,533,983 each,
which expire through the year 2010. The ability of the Company to utilize the
carryforwards may be severely limited should its line of business (solar) or its
ownership change.
Note F: Commitment
Pursuant to a letter of intent signed on August 9, 1995,
to acquire a privately held operating company, the Company is committed to
paying certain legal, accounting and other fees in connection with the
acquisition. The Company estimates that its commitment for these costs at
December 31, 1995 is approximately $23,400.
Contingency
The Company is contingently liable on judgment claims totalling $4,017,
plus accrued interest, to creditors who are no longer in business.
Note G: Proposed merger
The Company entered into a letter of intent dated August 9, 1995, to
acquire a privately held operating company. Subject to the successful completion
of a private placement of 200,000 shares of it's $.50 par value common stock,
the Company plans to acquire 100 percent of the stock of the operating company
by issuing approximately 19,669,366 shares of restricted common stock and
112,750 shares of voting preferred stock to shareholders of the operating
company. Upon completion of the transaction, approximately 95 percent of the
shares of the Company's common stock (fully diluted) will be held by
shareholders of the operating company.
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND
SUBSIDIARY (A DEVELOPMENT STAGE COMPANY)
Notes To Consolidated Financial Statements, Concluded
December 31, 1995
Note H: Basis of presentation
In the course of its development activities, the Company has sustained
continuing operating losses and expects such losses to continue for the
foreseeable future. The Company plans to continue to finance its operations with
a combination of stock sales and in the longer term, revenues from the
operations of its proposed merger candidate. The Company's ability to continue
as a going concern is dependent upon successful completion of its private
placement and additional financings and, ultimately, upon achieving profitable
operations.
Note I: Subsequent events
On January 23, 1996, an individual purchased 10,000 shares of the Company's
$.50 par value common stock for $5,000.
On February 13, 1996, an individual purchased 20,000 shares of the
Company's $.50 par value common stock for $10,000.
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(a Development Stage Enterprise)
Consolidated, Condensed Balance Sheets
ASSETS
June 30, December 31,
1996 1995
------------ ------------
ASSETS
Cash.................................... $ 633 $ 12,509
Advance to merger candidate (Note E).... 40,000 40,000
Organization costs...................... 915 915
Deferred offering costs (Note F)........ - 500
------------ ------------
$ 41,548 $ 53,924
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable.......................$ 1,574 $ 4,228
Other current liabilities.............. 25,222 22,548
------------ ------------
Total liabilities.................... 26,796 26,776
------------ ------------
SHAREHOLDERS' EQUITY (Note D)
Common stock........................... 713,798 636,925
Other shareholders' deficit............. (699,046) (609,777)
------------ ------------
Total shareholders' equity............ 14,752 27,148
------------ ------------
$ 41,548 $ 53,924
============ ============
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated, Condensed Statements of Operations
January 1, 1992
Six Months Ended (Inception)
June 30, Through
----------------------- June 30,
1996 1995 1996
----------- ---------- ------------
<S> <C> <C> <C>
COSTS AND EXPENSES
General and administrative,
related parties, (Note B)................... $ 7,500 $ 4,456 $ 137,334
General and administrative.................... 17,154 22,687 51,186
Cost of proposed acquisition.................. 63,213 - 115,651
Interest expense.............................. 902 778 5,453
----------- ---------- ------------
88,769 27,921 309,624
NET LOSS........................................ $ (88,769) $ (27,921) $ (309,624)
----------- ---------- ------------
Weighted average shares outstanding............. 1,334,265 1,008,759 427,315
----------- ----------- ------------
Net loss per share.............................. $ (.07) $ (.03) $ (.72)
----------- ----------- ------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(a Development Stage Enterprise)
Consolidated, Condensed Statements of Cash Flows
January 1,
Six Months Ended 1992
June 30, Through
------------------------- June 30,
1996 1995 1996
------------ ------------ ------------
Cash flows from operating
activities:
Cash used in operating
activities................. $ (83,249) $ (3,044) $ (165,740)
------------ ------------ ------------
Cash flows from financing
activities:
Contributed capital ....... - 3,044 -
Offering costs incurred
(Note F)................. (500) - (500)
Sale of common stock
(Note D)................. 71,873 - 166,873
------------ ------------ ------------
Cash provided by
financing activities....... 71,373 3,044 166,373
------------ ------------ ------------
Net increase (decrease) in
cash and cash equivalents.. (11,876) - 633
Cash and cash equivalents at
beginning of period......... 12,509 - -
------------ ------------ ------------
Cash and cash equivalents at
end of period.............. $ 633 $ - $ 633
============ =========== ============
Supplementary disclosure of
cash flow information:
Cash paid during the
period for:
Interest................ $ - $ - $ -
Income taxes............ $ - $ - $ -
Noncash financing activities:
Shares issued to the
president of the Company
in exchange for debt..... $ - $ - $ 40,018
Shares issued to related
parties in exchange for
debt..................... $ - $ - $ 558,206
Shares issued to judgement
creditors in exchange for
satisfaction of judgement $ - $ - $ 21,815
See accompanying notes to financial statements.
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(a Development Stage Enterprise)
Consolidated, Condensed Statements of Cash Flows, Concluded
January 1,
Six Months Ended 1992
June 30, Through
------------------------- June 30,
1996 1995 1996
------------ ------------ ------------
Noncash financing activities,
continued:
Shares issued for services $ 5,000 $ - $ 71,750
Shares issued for
compensation:
President............. $ - $ - $ 102,750
Secretary............. $ - $ - $ 1,500
See accompanying notes to financial statements.
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(a Development Stage Enterprise)
Notes to Consolidated, Condensed Financial Statements
June 30, 1996
Note A: Basis of presentation
The financial statements presented herein have been prepared by the
Company in accordance with the accounting policies in its Form 10-KSB
report dated December 31, 1995 and should be read in conjunction with
the notes thereto.
In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) which are necessary to a fair
presentation of operating results for the interim periods presented
have been made.
Interim financial data presented herein are unaudited.
Note B: Related party transactions
During the six months ended June 30, 1996, the Company paid $7,500,
for services and payments made on behalf of the Company, to an
unconsolidated affiliate.
Note C: Income taxes
At June 30, 1996, deferred taxes consisted of:
June 30,
1996 1995
------------ ------------
Deferred tax asset, net
operating loss carryforward.... $ 539,986 $ 500,435
Valuation allowance.............. (539,986) (500,435)
Net deferred taxes............... $ - $ -
------------ ------------
The valuation allowance offsets the net deferred tax asset for which
there is no assurance of recovery.
The Company has available, as of December 31, 1995, unused operating
loss carryforwards for Federal and State purposes of approximately
$1,533,983 each, which expire through the year 2010. The ability of
the Company to utilize the carryforwards may be severely limited
should its line of business (solar) or its ownership change.
<PAGE>
SOLAR ENERGY
RESEARCH CORP. AND SUBSIDIARY
(a Development Stage Enterprise)
Notes to Consolidated, Condensed Financial Statements, Continued
June 30, 1996
Note D: Shareholders' equity
During the six months ended June 30, 1996, the Company issued 128,746
shares of its $.50 par value common stock to accredited investors for
$64,373 cash. The Company has utilized this cash together with cash
from the sale of its common stock to other accredited investors to pay
certain expenses in connection with the reverse acquisition of Telegen
Corporation, an operating California corporation. The Company also
issued 10,000 shares of common stock as payment for legal services
valued at $5,000. Shareholders' equity transactions during the six
months ended June 30, 1996, consisted of the following:
Other
Common Stock Shareholders'
Shares Par Value Equity
----------- ----------- -----------
Balance at
December 31, 1995.... 1,273,850 $ 636,925 $ (609,777)
Shares issued for cash,
January 23, 1996..... 10,000 5,000 -
Shares issued for cash,
February 13, 1996.... 20,000 10,000 -
Shares issued for
services,
April 3, 1996........ 10,000 5,000 -
Shares issued for cash,
April 17, 1996....... 10,000 5,000 -
Shares issued for cash,
April 26, 1996....... 58,746 29,373 -
Shares issued for cash,
May 28, 1996......... 22,500 11,250 -
Shares issued for cash,
June 6, 1996......... 22,500 11,250 -
Offering costs incurred - - (500)
Net loss for the six
months ended
June 30, 1996........ - - (88,769)
----------- ----------- -----------
Balance at
June 30, 1996........ 1,427,596 $ 713,798 $ (699,046)
=========== =========== ===========
<PAGE>
SOLAR ENERGY
RESEARCH CORP. AND SUBSIDIARY
(a Development Stage Enterprise)
Notes to Consolidated, Condensed Financial Statements, Continued
June 30, 1996
Note E: Proposed merger
The Company, together with its merger candidate Telegen Corporation
(Telegen), have executed a definitive agreement and amendments whereby
the Company will acquire Telegen in a reverse acquisition. Telegen was
founded in 1990, and is engaged in the design, development,
manufacture (through contract manufacturers) and sales (through
manufacturers representatives and private label resellers),
intelligent telecommunications products which provide supplementary
features to existing telephone equipment and services for customers
and small businesses.
In an amendment to the agreement, Telegen agreed to pay all
professional fees related to the acquisition after May 31, 1996.
Telegen also agreed to advance the Company $28,127 toward the $200,000
required to be raised by the Company to cover legal and accounting
preacquisition costs. Should Telegen cancel the transaction, it is
required to reimburse the Company for pre-acquisition costs up to
$171,873. As of June 30, 1996, the Company had incurred
pre-acquisition costs totalling $155,651; $40,000, previously advanced
to Telegen plus the costs-to-date of the merger, paid by the Company,
totalling $115,651.
The Company received the $28,127 advance from Telegen on July 26,
1996. Management believes this advance is sufficient to cover the
Company's current liabilities and future expenses up to the time of
the acquisition's completion.
As part of the reorganization, the Company will execute a 7.25 for 1
reverse split of its shares. The Company plans to issue approximately
3,917,287 (post-split) shares of common stock to acquire all of the
then outstanding shares of Telegen. In addition, the Company plans to
re-incorporate in California and the definitive agreement calls for
Telegen to merge into the California corporation.
<PAGE>
SOLAR ENERGY
RESEARCH CORP. AND SUBSIDIARY
(a Development Stage Enterprise)
Notes to Consolidated, Condensed Financial Statements, Concluded
June 30, 1996
Note F: Private offering
During the three months ended June 30, 1996, the Company completed a
private offering of its $.50 par value common stock in which it raised
$171,873 for pre-acquisition costs related to the proposed merger.
In connection with the offering of its common shares, the Company
incurred offering costs consisting of legal fees totalling $500. No
commissions were paid to underwriters. The Company completed the
private offering during the three months ended June 30, 1996 and
offset the offering costs against additional paid-in capital in the
accompanying financial statements in other shareholders' equity.
Note G: Subsequent event
On July 26, 1996, the Company received $28,127 from Telegen to be used
to pay general and administrative expenses and all costs for the
completion of the reorganization agreement except professional fees.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders
Telegen Corporation
Foster City, California
We have audited the balance sheets of Telegen Corporation as of December 31,
1995 and 1994, and related statements of operations, shareholders' equity
(deficit), and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 at December
31, 1995 and 1994, and the results of its operations and its cash flows for each
of the years then ended in conformity with generally accepted accounting
principles.
/S/ Coopers & Lybrand, L.L.P.
-----------------------------
Coopers & Lybrand, L.L.P.
Sacramento, California
April 19, 1996
<PAGE>
<TABLE>
<CAPTION>
TELEGEN CORPORATION BALANCE SHEETS
as of December 31, 1995 and 1994
ASSETS
1995 1994
<S> <C> <C>
----------- -----------
Current assets:
Cash and cash equivalents ....................... $ 177,904 $ 97,725
Restricted cash ................................. -- 20,000
Accounts receivable, trade ...................... 3,704 9,407
Accounts receivable, other (net of allowance
for doubtful accounts of $14,113 and $0 at 1995
and 1994, respectively) ......................... 2,186 18,978
Inventory ....................................... 377,627 145,290
Prepaid expenses and other current assets ....... -- 28,044
----------- -----------
Total current assets ......................... 561,421 319,444
Property and equipment, net .............................. 147,243 218,527
Deferred financing costs, net ............................ 197,248 --
Other assets ............................................. 15,712 28,981
----------- -----------
$ 921,624 $ 566,952
=========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable ............. $ 279,343 $ 158,851
Current maturities of notes payable
- shareholder ................................... 375,473 14,515
Accounts payable, trade ......................... 1,147,953 332,521
Accounts payable, other ......................... 2,102 8,117
Accrued expenses ................................ 518,732 195,457
----------- -----------
Total current liabilities ................... 2,323,603 709,461
Notes payable - shareholder, long-term portion ........... 167,649 178,976
----------- -----------
Total liabilities ........................... 2,491,252 888,437
----------- -----------
Commitments and contingencies (Notes 6, 12 and 13)
Shareholders' equity (deficit):
Series A Convertible preferred stock, $10
liquidation preference, authorized 550,000
shares, 112,750 and 47,500 shares issued
and outstanding at 1995 and 1994,
respectively (Note 7) ........................... 922,526 350,704
Common stock, no par value; authorized
10 million shares, 2,717,927 and 2,621,642 shares
issued and outstanding at 1995 and 1994,
respectively .................................... 2,809,703 2,111,742
Accumulated deficit ............................. (5,301,857) (2,783,931)
----------- -----------
Total shareholders' deficit .................. (1,569,628) (321,485)
----------- -----------
$ 921,624 $ 566,952
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
TELEGEN CORPORATION STATEMENTS OF OPERATIONS
for the years ended December 31, 1995 and 1994
1995 1994
----------- -----------
Sales ....................... $ 145,795 $ 432,972
Cost of goods sold .......... (170,421) (314,239)
----------- -----------
Gross profit (loss) (24,626) 118,733
Operating expenses:
Selling and marketing ..... 84,467 92,170
Research and development .. 826,984 830,913
General and administrative 1,501,469 1,118,312
----------- -----------
Loss from operations (2,437,546) (1,922,662)
Other income/(expense):
Interest income ........... 725 9,608
Interest expense .......... (81,105) (30,658)
----------- -----------
Net loss ........... $(2,517,926) $(1,943,712)
=========== ===========
The accompanying notes are an integral part of these financial statements
<PAGE>
<TABLE>
<CAPTION>
TELEGEN CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT)
for the years ended December 31, 1995 and 1994
Preferred Stock Common Stock
------------------------- ------------------------- Accumulated
Shares Amount Shares Amount Deficit Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 ... -- -- 2,532,657 $ 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 ... 47,500 350,704 2,621,642 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 costs of $70,933 ... -- -- 96,285 445,966 -- 445,966
Issuance of common stock
warrants .................... -- -- -- 251,995 -- 251,995
Net loss ..................... -- -- -- -- (2,517,926) (2,517,926)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 ... 112,750 $ 922,526 2,717,927 $ 2,809,703 $(5,301,857) $(1,569,628)
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements
<PAGE>
<CAPTION>
TELEGEN CORPORATION STATEMENTS OF CASH FLOWS
for the years ended December 31, 1995 and 1994
1995 1994
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................... $(2,517,926) $(1,943,712)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation ............................... 58,784 53,509
Amortization ............................... 13,269 13,251
Amortization of deferred financing costs ... 22,529 --
Accretion of bridge loan discount .......... 17,833 --
Allowance for doubtful accounts ............ 14,113 --
Provision for inventory write-downs ........ 19,381 --
Operating expenses paid with issuance of
common stock and common stock equivalents 536,964 209,219
Interest expense added to note payable
principal ................................ 20,853 28,162
Changes in assets and liabilities:
Decrease (increase) in accounts
receivable .......................... 8,382 167,089
Decrease (increase) in prepaid expenses 28,044 (28,044)
(Increase) in inventory ............... (251,718) (130,885)
Decrease in other assets .............. -- 5,497
Increase in trade and other accounts
payable ............................. 672,435 204,314
Increase in accrued expenses .......... 323,275 147,999
----------- -----------
Total adjustments ................... 1,484,144 670,111
----------- -----------
Net cash used in operating
activities ........................ (1,033,782) (1,273,601)
----------- -----------
Cash flows used in investing activities:
Insurance proceeds on fixed assets ......... 12,500 --
Purchase of fixed assets ................... -- (117,125)
Purchase of intangible assets .............. -- (1,120)
----------- -----------
Net cash provided by (used in)
investing activities .................... 12,500 (118,245)
----------- -----------
Cash flows from financing activities:
Proceeds from borrowings ................... 457,640 19,311
Principal payments on notes payable ........ (26,203) --
Issuance of common stock ................... 163,165 142,320
Issuance of preferred stock, net of
offering costs ........................... 571,822 350,704
Bridge loan offering costs ................. (84,963) --
----------- -----------
Net cash provided by financing
activities ............................. 1, 081,461 512,335
----------- -----------
Net increase (decrease) in cash and cash
equivalents ........................................ 60,179 (879,511)
Cash and cash equivalents at beginning of year ...... 117,725 997,236
=========== ===========
Cash and cash equivalents at end of year ............ $ 177,904 $ 117,725
=========== ===========
Supplemental disclosures:
Cash paid for interest ..................... $ 98 $ --
=========== ===========
Cash paid for income taxes ................. $ 800 $ 800
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
TELEGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Nature of Business
Telegen Corporation (the Company) was incorporated in the state of
California on May 3, 1990. The Company designs, develops and manufactures
intelligent telecommunication, internet hardware, and flat panel display
products. Currently, the Company is only marketing its telecommunications
products. Subsequent to year-end the Company formed a subsidiary, Telegen
Display Laboratories to oversee the development of the Company's flat panel
products.
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.
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 recognizes revenues when products are shipped.
Research and Development Costs
Expenditures relating to the development of new products and processes,
including significant improvements to existing products, are expensed as
incurred.
Income Taxes
The Company reports income taxes in accordance with Statement of Financial
Accounting Standards 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.
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 Pronouncement
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 establishes fair value based accounting and reporting
standards for stock-based employee compensation plans. The statement defines a
fair value based 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 of accounting
prescribed by APB Opinion No. 25 Accounting for Stock Issued to Employees. SFAS
No. 123 requires, for those electing to remain with the APB Opinion No. 25
accounting, pro forma disclosure of net income and earnings per share as if the
fair value based method had been applied.
The Company will adopt SFAS No. 123 for 1996 and is expected to elect to
continue to measure and record compensation costs as defined in APB Opinion No.
25. The Company is currently determining the impact of the adoption of SFAS No.
123 on its disclosures in its financial statements.
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.
2. Inventory:
Inventories at December 31, consist of the following:
1995 1994
-------- --------
Raw materials and supplies $360,046 $118,255
Finished goods - Teleblocker 11,043 27,035
Finished goods - ACS 6,538 -
-------- --------
$377,627 $145,290
======== ========
3. Property and Equipment:
Property and equipment are stated at cost and consist of the following at
December 31:
1995 1994
-------- --------
Machinery and equipment $ 136,762 $ 151,762
Leasehold improvements 3,453 3,453
Office furniture and fixtures 156,437 156,437
------- ---------
296,652 311,652
Less accumulated depreciation (149,409) (93,125)
------- ---------
$ 147,243 $ 218,527
========= =========
4. Other Assets:
Other assets are stated at cost and consist of the following:
1995 1994
------- --------
Organizational costs $ 5,930 $ 5,930
Trademarks 47,755 47,755
Patents 13,225 13,225
------- --------
66,910 66,910
Less accumulated amortization (64,694) (51,425)
------- --------
2,216 15,485
Deposits 13,496 13,496
------- --------
$ 15,712 $ 28,981
======== ========
5. Notes Payable:
Notes payable consist of the following at December 31:
1995 1994
--------- ---------
Note payable to shareholder,
interest at 8%, principal and
accrued interest due July 1,
1997, without collateral. $ 167,649 $ 193,491
Note payable (line of credit),
including accrued interest
to a bank with interest at
13%, without collateral. 172,370 152,540
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 (see Note 6). 350,473 -
Convertible subordinated note payable,
interest at 18%, principal and accrued
interest due August 1995, without
collateral. 100,000 -
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 6,973 6,311
-------- --------
822,465 352,342
Less current maturities (654,816) (173,366)
-------- --------
$ 167,649 $ 178,976
-------- --------
The terms of the note payable to a shareholder for $167,649 were amended in
November 1995. As a result of the amendment, this balance has been recorded as
long-term. Accrued interest totaling $1,023 and $13,514 at December 31, 1995 and
1994, respectively, are included in the note balances above.
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 is the subject of litigation between the lender
and the Company. The lender has sued the Company for non-payment. The Company
alleges that the lender did not perform under the terms of the original note.
Common stock totaling 208,000 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. While the
ultimate outcome of this litigation cannot be determined at this time, the
Company believes it has meritorious defenses under the terms of the note and the
outcome will not have a materially adverse effect on its financial condition or
results of operations. The full balance of the note and interest accrued thereon
at 13% per annum are reflected as current liabilities as of December 31, 1995
and 1994.
6. Bridge Financing:
On October 23, 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 5)
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 has 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.
As of December 31, 1995, the Company had received gross Bridge Loan
proceeds of $440,000 from the issuance of one-year notes and 21,472 shares of
the Company's common stock. Of the total proceeds, $107,360 was allocated to
common stock and $332,640 was allocated to debt. The Agent received $69,390 from
the proceeds and 41,149 shares of common stock. Other offering expenses were
approximately $15,600. Aggregate financing costs of $290,710 were allocated to
debt financing costs and common stock in the amounts of $219,777 and $70,933,
respectively.
Subsequent to year end, the Company received an additional $275,000 from
the issuance of one-year notes and 13,420 shares of the Company's common stock.
Of the total proceeds, $67,100 was allocated to common stock and $207,900 was
allocated to debt. The Agent received $42,540 from the proceeds and 25,719
shares of common stock as commission on the transaction. Other offering expenses
were approximately $17,500. Aggregate financing costs of $188,668 were allocated
to debt financing costs and common stock in the amounts of $142,633 and $46,035,
respectively.
7. Shareholders' Equity:
Convertible Preferred Stock
The Company has 1,000,000 shares of Preferred Stock authorized of which
550,000 shares are designated Series A. Each share of Series A Convertible
Noncumulative Preferred Stock is entitled to one vote per share of common stock
into which the Preferred is convertible into common stock at the holder's
discretion. The Series A Preferred Stock will 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 will initially be 1:1, subject, in certain circumstances, to
anti-dilutive adjustments. Each share of Series A Preferred Stock is 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 is entitled to receive, in preference to
the Common shareholders, an amount equal to $10 per Preferred Share, which
depending on circumstances, may be paid in cash or securities of any entity
surviving the liquidation.
Stock Option and Incentive Plan
On October 29, 1993, the Company authorized a stock option plan under which
options to purchase shares of common stock may be granted to full time
employees. The number of options granted is based on employee performance. The
plan provides that the option price shall not be less than the fair market value
of the shares on the date of grant. Options are exercisable on the date of the
grant, expire five years from the date of grant and vest over varying lengths of
time, up to twelve months.
In 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 1995 and 1994,
respectively 1,582 shares and 7,392 shares were issued to employees and $7,910
and $36,960 was recorded as an expense. Options granted under this plan are
included in the table below.
The following summarizes the stock option transactions for the two-year
period ended December 31, 1995:
Number of Option Price Per
Shares Share
--------- ----------------
Outstanding and exercisable at
December 31, 1993 13,216
Issued 1,873 $ 1.00
2,266 $ 4.00
346,499 $ 5.00
Exercised (150) $ 5.00
Canceled -
-------
Outstanding and exercisable at
December 31, 1994 363,704
Issued 92,195 $ 5.00
Exercised (1,061) $ 5.00
Canceled -
-------
Outstanding and exercisable at
December 31, 1995 454,838
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. A total of 200,000 options were granted, of which
100,000 vest immediately and the remaining options vest in 50,000 share
increments upon the Company achieving certain performance goals.
In February 1996, the Board authorized the granting of 17,000 options to an
employee to purchase company 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.
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.
8. 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, 1995 and 1994, under the provisions of SFAS No. 109 are as follows:
1995 1994
Federal net operating loss carryforward $ 1,658,234 $ 873,684
State operating loss carryforward 292,630 154,084
--------- ---------
1,950,864 1,027,768
Less valuation allowance (1,950,864) (1,027,768)
--------- ---------
$ - $ -
========= =========
Net operating loss carryforwards of $4,877,159 expire from 2005 to 2010 for
federal income tax reporting purposes and from 1998 to 2000 for state tax
reporting purposes.
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.
9. 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.
Line of Credit
The carrying value of the Company's line of credit is assumed to
approximate fair values due to its short-term maturities.
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.
10. Supplemental Disclosure of Non-Cash Investing and Financing Activities:
During the years ended December 31, 1995 and 1994, the Company received the
following services in exchange for common stock:
1995 1994
------------------ -------------------
Services Shares Services Shares
Received Issued Received Issued
-------- ------ -------- ------
Legal Services $217,000 43,083 $166,000 38,421
Employee Services 7,900 1,582 37,000 7.342
Deferred Financing Costs 49,500 9,899 -- --
Other Services 51,000 23,687 19,000 3,418
Accounts Payable 3,300 400 52,000 14,010
In addition, approximately $252,000 in employee services was received in
exchange for 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. 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 addition, approximately $252,000 in
employee services was received in exchange for common stock warrants (Note 7).
Common stock issued in exchange for services were recorded at estimated fair
market value.
In 1994, the Company received a vehicle in exchange for $5,000 in cash and
a note payable to the seller for $10,000.
In 1994, the Company received a vehicle in exchange for $5,000 in cash and
a note payable to the seller for $10,000.
11. Proposed Merger:
The Company has entered into an agreement dated November 16, 1995, as
amended by Amendment No. 1, dated January 18, 1996, and Amendment No. 2, dated
April 9, 1996, whereby the Company would merge with a SEC registrant
(Registrant). Pursuant to the merger agreement, among other things, each share
of common and preferred stock of the Company would be 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
would be known as Telegen Corporation and the directors of the Company
immediately prior to the merger will be the directors of the surviving company.
Additionally, certain key employees of the Company will enter into employment
contracts, effective upon the consummation of the merger. Among other
conditions, the proposed merger is subject to the approval of the majority of
the outstanding voting shares of the Registrant. Under certain circumstances, if
the agreement is terminated, the Company may be liable for up to $200,000 in
expenses incurred by the Registrant related to this transaction. Additional
shares may be issued to shareholders of the Registrant if certain post-merger
stock price parameters are not met over the period occurring between the merger
closing date and December 31, 1997.
12. Commitments:
The Company leases its facilities and certain equipment under long-term,
noncancelable lease agreements which have been accounted for as operating
leases. The leases require that the Company pay all property taxes, insurance
costs, repairs and common area maintenance expenses associated with its portion
of the facilities. The Company's noncancelable lease agreement expires during
1996. Minimum payments during 1996 under the lease terms are $97,698.
Rental expense charged to operations for all operating leases was
approximately $202,000 and $189,000 for the years ended December 31, 1995 and
1994, respectively.
Subsequent to December 31, 1995, the Company's Board of Directors approved
the future grant of a 5% interest in the Company's subsidiary, Telegen Display
Laboratories, to a director of the subsidiary.
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.
Currently, all of 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.
13. Contingencies:
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.
14. Related Party Transactions:
Revenues for the year ended December 31, 1995, includes approximately
$30,000 in sales to a business whose principal is a director of the Company.
15. Subsequent Events:
In February 1996, the Company initiated a private offering of up to
1,320,000 shares of common stock at $5 per share. The placement agent will
receive a commission of 15% of the funds raised and will pay $100 for warrants
to purchase a number of shares equal to 10% of the shares sold in the offering.
The warrants would be exercisable at $3.50 per share. The placement agent may
also be granted up to 136,000 shares of common stock based on certain parameters
related to the offering. Through April 1996, Telegen had received gross proceeds
of approximately $6,500,000 and had paid approximately $990,000 in fees to the
placement agent.
<PAGE>
TELEGEN CORPORATION BALANCE SHEET AS OF JUNE 30, 1996
(Unaudited)
ASSETS
CURRENT ASSETS:
CASH EQUIVALENTS $ 7,895,577
ACCOUNTS RECEIVABLE TRADE 4,998
ACCOUNTS RECEIVABLE OTHER 24,545
INVENTORY 334,031
-----------
TOTAL CURRENT ASSETS 8,259,151
PROPERTY & EQUIPMENT (NET) 231,078
OTHER ASSETS 63,496
-----------
$ 8,553,725
===========
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT MATURITIES NOTES PAYABLE $ 334,666
TRADE ACCOUNTS PAYABLE 199,942
ACCOUNTS PAYABLE OTHER -
ACCRUED EXPENSES 267,767
----------
TOTAL CURRENT LIABILITIES 802,375
NOTES PAYABLE LONG TERM -
----------
TOTAL LIABILITIES 802,375
----------
SHAREHOLDERS' EQUITY
SERIES A CONVERTIBLE
PREFERRED STOCK 922,526
COMMON STOCK 13,577,632
ACCUMULATED DEFICIT (6,748,808)
----------
TOTAL SHAREHOLDERS' EQUITY 7,751,350
$ 8,553,725
===========
See accompanying notes to financial statements
<PAGE>
TELEGEN CORPORATION STATEMENT OF OPERATIONS FOR
THE SIX MONTHS ENDED JUNE 30, 1996
(Unaudited)
SALES $ 14,945
COST OF GOODS SOLD 12,082
------------
GROSS PROFIT 2,863
OPERATING EXPENSE:
SALES & MARKETING 5,249
RESEARCH & DEVELOPMENT 291,075
GENERAL & ADMINISTRATIVE 994,033
------------
LOSS FROM OPERATIONS (1,287,494)
OTHER INCOME & EXPENSE
INTEREST INCOME 55,608
INTEREST EXPENSE 215,066
------------
LOSS BEFORE INCOME TAXES (1,446,952)
PROVISION FOR IMCOME TAXES --
------------
NET LOSS (1,446,952)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,941,693
------------
NET LOSS PER COMMON SHARE $ (0.37)
============
See accompanying notes to financial statements.
<PAGE>
TELEGEN CORPORATION STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(Unaudited)
SALES $ 106,235
COST OF GOODS SOLD 97,025
----------
GROSS PROFIT 9,210
OPERATING EXPENSE:
SALES & MARKETING 62,088
RESEARCH & DEVELOPMENT 351,826
GENERAL & ADMINISTRATIVE 483,823
----------
LOSS FROM OPERATIONS (888,527)
OTHER INCOME & EXPENSE
INTEREST INCOME 325
INTEREST EXPENSE 8,956
----------
LOSS BEFORE INCOME TAXES (897,158)
PROVISION FOR INCOME TAXES --
----------
NET LOSS $ (897,158)
==========
See accompanying notes to financial statements.
<PAGE>
TELEGEN CORPORATION STATEMENT OF CASH FLOWS FOR
THE SIX MONTHS ENDED JUNE 30, 1996
(Unaudited)
CASH FLOW FROM OPERATING ACTIVITIES
NET LOSS $ (1,446,952)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH USED IN OPERATING ACTIVITIES:
DEPRECIATION 31,873
AMORTIZATION 2,217
AMORTIZATION OF DEFERRED FINANCE COST 197,248
OPERATING EXPENSES PAID WITH
ISSUANCE OF COMMON STOCK 100,498
INTEREST EXPENSE ADDED TO NOTE PAYABLE 188,560
CHANGES IN ASSETS & LIABILITIES
DECREASE (INCREASE) IN ACCOUNTS RECEIVABLE (23,653)
DECREASE (INCREASE) IN INVENTORY 43,596
DECREASE (INCREASE) OTHER ASSETS (50,000)
INCREASE (DECREASE) IN ACCOUNTS PAYABLE (950,114)
INCREASE (DECREASE) IN ACCRUED EXPENSES (250,965)
--------
TOTAL ADJUSTMENTS (710,740)
--------
NET CASH USED IN OPERATING ACTIVITIES (2,157,692)
CASH FLOWS USED IN INVESTING ACTIVITIES
PURCHASE OF FIXED ASSETS (115,709)
PURCHASE OF INTANGIBLE ASSETS --
--------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (115,709)
CASH FLOWS FROM FINANCING ACTIVITIES:
NET PROCEEDS FROM BORROWINGS 207,900
PRINCIPAL PAYMENTS ON NOTES PAYABLE (884,257)
ISSUANCE OF COMMON STOCK 10,667,431
---------
ISSUANCE OF PREFERRED STOCK, NET OF OFFERING COSTS --
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,991,074
---------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 7,717,673
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 177,904
---------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 7,895,577
=========
SUPPLEMENTAL DISCLOSURES:
CASH PAID FOR INTEREST $ 30,192
=============
CASH PAID FOR INCOME TAXES $ 800
=============
See accompanying notes to financial statements.
<PAGE>
TELEGEN CORPORATION STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(Unaudited)
CASH FLOW FROM OPERATING ACTIVITIES
NET LOSS $ (897,158)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH USED IN OPERATING ACTIVITIES:
DEPRECIATION 29,392
AMORTIZATION 6,635
AMORTIZATION OF DEFERRED FINANCE COST --
OPERATING EXPENSES PAID WITH
ISSUANCE OF COMMON STOCK 82,618
INTEREST EXPENSE ADDED TO NOTE PAYABLE 8,956
CHANGES IN ASSETS & LIABILITIES
DECREASE (INCREASE) IN ACCOUNTS RECEIVABLE (4,148)
DECREASE (INCREASE) IN INVENTORY 93,966
DECREASE (INCREASE) OTHER ASSETS 22,465
INCREASE (DECREASE) IN ACCOUNTS PAYABLE (57,111)
INCREASE (DECREASE) IN ACCRUED EXPENSES 182,493
---------
TOTAL ADJUSTMENTS 365,266
---------
NET CASH USED IN OPERATING ACTIVITIES (531,892)
CASH FLOWS USED IN INVESTING ACTIVITIES:
PURCHASE/DISPOSAL OF FIXED ASSETS 12,500
PURCHASE/DISPOSAL OF INTANGIBLE ASSETS --
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 12,500
CASH FLOWS FROM FINANCING ACTIVITIES:
NET PROCEEDS FROM BORROWINGS 100,366
PRINCIPAL PAYMENTS ON NOTES PAYABLE --
ISSUANCE OF COMMON STOCK 55,805
ISSUANCE OF PREFERRED STOCK, NET OF OFFERING COSTS 343,243
NET CASH PROVIDED BY FINANCING ACTIVITIES 499,414
---------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS (19,978)
CASH & CASH EQUIVALENTS AT BEGINNING OF QUARTER 117,725
---------
CASH & CASH EQUIVALENTS AT END OF QUARTER $ 97,747
=========
SUPPLEMENTAL DISCLOSURES:
CASH PAID FOR INTEREST $ 98
=========
CASH PAID FOR INCOME TAXES $ --
=========
See accompanying notes to financial statements.
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000906448
<NAME> Solar Energy Research Corp.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1.000
<CASH> 633
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 40,633
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 41,548
<CURRENT-LIABILITIES> 26,796
<BONDS> 0
0
0
<COMMON> 713,798
<OTHER-SE> (699,046)
<TOTAL-LIABILITY-AND-EQUITY> 41,548
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 87,867
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 902
<INCOME-PRETAX> (88,769)
<INCOME-TAX> 0
<INCOME-CONTINUING> (88,769)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (88,769)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000906448
<NAME> Telegen Corporation
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1.000
<CASH> 7,895,577
<SECURITIES> 0
<RECEIVABLES> 29,543
<ALLOWANCES> 0
<INVENTORY> 334,031
<CURRENT-ASSETS> 8,259,151
<PP&E> 231,078
<DEPRECIATION> 178,801
<TOTAL-ASSETS> 8,553,725
<CURRENT-LIABILITIES> 802,375
<BONDS> 0
0
922,526
<COMMON> 13,577,632
<OTHER-SE> (6,748,808)
<TOTAL-LIABILITY-AND-EQUITY> 8,553,725
<SALES> 14,945
<TOTAL-REVENUES> 14,945
<CGS> 12,082
<TOTAL-COSTS> 12,082
<OTHER-EXPENSES> 1,290,357
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 215,066
<INCOME-PRETAX> (1,446,952)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,446,952)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,446,952)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
