As filed with the Securities and Exchange Commission May 17, 1996.
Securities Act Registration No. 33-_____
Securities Exchange Act Registration No. 0-21864
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SOLAR ENERGY RESEARCH CORP.
(Exact name of registrant as specified in charter)
Colorado 6749 84-0672714
(State or other (Primary Standard I.R.S. (I.R.S. Employer
jurisdiction of Classification Code Number) Identification
incorporation) Number)
10075 E. County Line Road
Longmont, Colorado 80501
(303) 772-3316
(Address, including zip code and telephone number, including
area code, of registrant's principal executive offices)
With copies to:
Roger V. Davidson, Esq. Thomas C. DeFilipps, Esq.
Cohen Brame & Smith P.C. Wilson, Sonsini, Goodrich & Rosati P.C.
1700 Lincoln Street, Suite 1800 650 Page Mill Road
Denver, CO 80203 Palo Alto, CA 94304-1050
(303) 837-8800 (415)493-9300
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective and all other
conditions to the consummation of the Acquisition pursuant to the Agreement and
Plan of Reorganization, as amended, described in the enclosed Prospectus and
Information Statement have been satisfied or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
<S> <C> <C> <C> <C>
Title of Each
Class of Amount Proposed Maximum Proposed Maximum Amount of
Security to be to be Offering Price Aggregate Offering Registration
Registered Registered Per Share Price(1) Fee(2)
Common Stock, 5,580,782 N/A $13,859,605 $4,779.17
no par value,
issuable upon
acquisition
Series A Preferred 112,750 N/A $922,526 $318.11
Stock, no par value, _________
issuable upon
acquisition $5,097.28
</TABLE>
(1) Estimated solely for purposes of calculating the Amount of Registration
Fee.
(2) The registration fee for the securities registered hereby has been
calculated pursuant to Rule 457(f) under the Securities Act of 1933, as amended,
by multiplying (i) $13,859,605, the estimated book value of the Telegen
Corporation common stock, assuming the exercise of all of the issued and
outstanding options to acquire 672,730 shares of Telegen common stock and all of
the issued and outstanding warrants to acquire 50,500 shares of Telegen common
stock, and (ii) $922,526, the estimated book value of Telegen Corporation
preferred stock by 1/29 of one percent.
___________________________________
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
Cross-Reference Sheet
Pursuant to Rule 404(a) of the Securities Act of 1933 and
Item 501(4) of Regulation S-B
Showing the Location in Prospectus and
Information Statement of Information
Required by Part I of Form S-4
Note:Both the Registrant and the Company to be Acquired are "small business
issuers." Therefore, pursuant to General Instruction D.3. to Form S-4, the
requirements of Regulation S-B instead of Regulation S-K have been followed
in preparing this Form S-4.
Caption in Prospectus
Form S-4 Item Number and Caption and Information Statement
A. Information about the Transaction
1 Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus Facing Page of Registration
Statement; Cross-Reference Sheet;
Outside Front Cover Page of
Prospectus and Information
Statement
2 Inside Front and Outside Back
Cover Pages of Prospectus Inside Front and Outside Back
Cover Pages of Prospectus and
Information Statement
3 Risk Factors, Ratio of Earnings
to Fixed Charges and Other
Information Introduction; Summary; Risk Factors
4 Terms of the Transaction Summary; The Acquisition
5 Pro Forma Financial Information Financial Statements; Pro Forma
Financial Information
6 Material Contacts with the
Company Being Acquired The Acquisition
7 Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters Not Applicable
8 Interests of Named Experts and
Counsel The Acquisition; Experts; Legal
Matter
9 Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities Indemnification of Directors and
Officers
B. Information About the Registrant
10 Information with Respect to S-3
Registrants Not Applicable
11 Incorporation of Certain
Information By Reference Not Applicable
12 Information with Respect to S-2
or S-3 Registrants Not Applicable
13 Incorporation of Certain
Information by Reference Not Applicable
<PAGE>
14 Information with Respect to
Registrants Other than S-3 or
S-2 Registrants Summary; Risk Factors;
Introduction; The Acquisition;
Information Concerning the SERC
Special Meeting; 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 Common Stock and Related
Stockholder Matters; Legal
Proceedings; Legal Matters;
Experts; Financial Information
C. Information About the Company Being Acquired
15 Information with Respect to S-3
Companies Not Applicable
16 Information with Respect to S-2
or S-3 Companies Not Applicable
17 Information with Respect to
Companies Other than S-3 or
S-2 Companies Summary; Risk Factors;
Introduction; The Acquisition;
Business of Telegen; Telegen
Management's Discussion and
Analysis of Financial Condition
and Results of Operations;
Security Ownership of Certain
Beneficial Owners and Management
Management of Telegen; Certain
Transactions with Management and
Others; Telegen Changes in and
Disagreements with Accountants on
Accounting and Financial
Disclosure; Market for Telegen
Securities and Related
Stockholder Matters; Telegen
Certain Relationships and Related
Transactions; Legal Proceedings;
Legal Matters; Experts; Financial
Statements
D. Voting and Management Information
18 Information if Proxies, Consents
or Authorizations are to be
Solicited Not Applicable
19 Information if Proxies, Consents
or Authorizations are not to be
Solicited in an Exchange Offer Outside and Inside Cover
Pages; Summary; Introduction;
The Acquisition; Information
Concerning the SERC Special
Meeting
As filed with the Securities and Exchange Commission on May 17, 1996
<PAGE>
[LETTERHEAD OF SOLAR ENERGY RESEARCH CORP.]
June __, 1996
To Our Shareholders:
On behalf of the Board of Directors of Solar Energy Research Corp., a
Colorado corporation ("SERC"), you are cordially invited to attend the Special
Meeting of Shareholders of SERC to be held on July __, 1996. At the SERC Special
Meeting, you will be asked to consider and vote upon the following matters: (i)
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"); (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 change the name of SERC
California (after giving effect to the proposed redomiciliation of SERC as a
California corporation) to Telegen Corporation.
The Agreement provides that the Acquisition, which will become effective
upon the closing, which currently is expected to occur on or before July __,
1996, will be consummated by SERC's issuance of one share of its common stock
(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 above
proposals for the SERC Special Meeting of Shareholders) for each share of
Telegen common stock issued and outstanding at the closing. In addition, SERC
will issue one share of its Series A preferred stock (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) 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 (after giving effect to the redomiciliation of SERC
as a California corporation) 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 April 30, 1996, there were 4,357,552 shares of Telegen common stock
and 112,750 shares of Telegen Series A preferred stock issued and outstanding,
as well as options to purchase 672,730 shares of Telegen common stock at a
weighted average exercise price of $4.99 per share. In addition, Telegen is in
discussion with private parties, including domestic and foreign corporations,
for the sale of up to 500,000 additional common shares, which have been
reserved.
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.
Approval of the Agreement, redomiciliation of SERC as a California
corporation and the amendment to change the name of SERC California (after
giving effect to the proposed redomiciliation of SERC as a California
corporation) 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 the
currently issued and outstanding shares of SERC common stock and the election of
the six current Telegen directors to the SERC California (after giving effect to
the proposed redomiciliation of SERC as a California corporation) Board of
Directors will require the affirmative vote of the majority of a quorum of SERC
common stock represented at the meeting. The undersigned, who beneficially owns
______% of the 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.
<PAGE>
After careful consideration, the SERC Board of Directors has concluded that
the Acquisition is fair to, and in the best interests of, SERC and the
shareholders of SERC and accordingly has approved the Agreement and each of the
other proposals related to the Acquisition listed above. There will be no
solicitation of proxies by the Board of Directors.
Sincerely,
JAMES B. WIEGAND
President
<PAGE>
SOLAR ENERGY RESEARCH CORP.
10075 E. COUNTY LINE ROAD
LONGMONT, COLORADO 80501
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY __, 1996
TO THE SHAREHOLDERS OF SOLAR ENERGY RESEARCH CORP.:
Notice is hereby given that a Special Meeting of Shareholders of Solar
Energy Research Corp., a Colorado corporation ("SERC"), will be held at 201
Steele Street, Suite 300, Denver, Colorado 80206, on July __, 1996, at 2:00 p.m.
local time 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, shares of Telegen common stock and preferred stock would be
converted into the right to receive shares of common stock and Series A
preferred stock, respectively, 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 shares of SERC common stock), all on the
terms and conditions set forth in the Agreement which appears as Exhibit A
to the accompanying Information Statement-Prospectus.
2. Approval of the redomiciliation of SERC as a California corporation through
the 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.
6. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
The Board of Directors has fixed May ___, 1996, at the close of business, as
the record date for the determination of stockholders entitled to notice
of, and to vote at, the Special Meeting or any adjournment thereof.
THERE WILL BE NO SOLICITATION OF PROXIES BY THE BOARD OF DIRECTORS.
Please carefully read the following Information Statement-Prospectus which
describes the terms of the Acquisition to be voted upon at the Special Meeting.
SERC has filed a Registration Statement with the Securities and Exchange
Commission covering the shares of its common and Series A preferred stock to be
issued in the Acquisition. The accompanying Information Statement also
constitutes the Prospectus of SERC filed as part of such Registration Statement.
______________________________
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.
BY ORDER OF THE BOARD OF DIRECTORS
JANET S. COLLINS
May __, 1996 Secretary
<PAGE>
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 July __, 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 May 17, 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
Page
SUMMARY 6
The Special Meeting of SERC Shareholders 6
The Acquisition 7
RISK FACTORS 13
SERC 13
Telegen 14
INTRODUCTION 19
THE ACQUISITION 20
The Parties 21
Background of the Acquisition 21
Summary of the Agreement 25
Vote Required 29
Availability of Appraisal Rights for Dissenting Shareholders 30
The SERC Board of Directors and Management Following the Acquisition 30
Resale of SERC Common and Series A Preferred Stock 30
Federal Income Tax Consequences of the Acquisition 30
Expenses of the Acquisition 31
Comparison of Rights of Holders of SERC Stock Under
Colorado and California Law 31
INFORMATION CONCERNING THE SERC SPECIAL MEETING 32
Matters to be Considered at Special Meeting 32
Meeting Procedures 45
Voting Rights and Votes Required 45
Stock Ownership of Directors, Executive Officers and their Affiliates 45
Executive Compensation 46
SERC 47
Business of SERC 47
SERC Plan of Operation 50
SERC Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 52
Security Ownership of Certain Beneficial Owners and Management 52
Market for SERC Securities and Related Stockholder Matters 53
Description of SERC Securities 54
Legal Proceedings 55
TELEGEN 56
Business of Telegen 56
Telegen Management's Discussion and Analysis of Financial Condition
and Results of Operations 71
Telegen Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 75
Security Ownership of Certain Beneficial Owners and Management 75
Management of Telegen 76
Certain Transactions with Management and Others 78
Market for Telegen Securities and Related Stockholder Matters 79
Legal Proceedings 79
LEGAL MATTERS 80
EXPERTS 80
FINANCIAL INFORMATION F1
<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 July __, 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
_____% 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 May ____, 1996. On May ____,
1996, there were __________ shares of SERC common stock outstanding and
approximately 2,240 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 shell 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 (currently expected to occur on or before July __, 1996), 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 April 30, 1996, there were 4,357,552 shares of Telegen common stock
and 112,750 shares of Telegen preferred stock issued and outstanding, as well as
options to purchase 672,730 shares of Telegen common stock at a weighted average
exercise price of $4.99 per share and warrants to purchase 50,500 shares of
Telegen common stock for $.01 per share. In addition, Telegen is in discussion
with private parties, including domestic and foreign corporations, for the sale
of up to 500,000 additional common shares, which have been reserved, for
purchase prices exceeding $5 per share.
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. 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 Meeting of SERC shareholders. Since
SERC's principal shareholder, who beneficially owns ______% 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 5,530,282
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 outstanding and shares which have
been reserved for issuance for the contemplated private placement by Telegen of
500,000 common shares.
As a result of the Acquisition, the shareholders of Telegen will own
approximately _____% of the total issued and outstanding shares of SERC,
assuming completion of the contemplated private placement of 500,000 common
shares by Telegen.
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 August 31, 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 one (1:1), 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,
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
The Agreement is structured in such a fashion that: (i) the Acquisition
should, among other things, constitute a "tax-free" reorganization under Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"); and (ii)
no gain or loss should be recognized by the Telegen shareholders with respect to
the shares of SERC common and Series A preferred stock received as a result of
the Acquisition. However, 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 three-month period ended March 31, 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
Three Months Ended March 31, 1996
(unaudited):
Loss per common and common
equivalent share $(0.03) $(0.13) $0.04 $(0.12)
Weighted average shares outstanding 1,292,183 3,687,436 (1,113,950) 3,865,669
</TABLE>
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 March 31, 1996, SERC had
only $4,476 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.
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 March 31, 1996 is
$5,774,785. 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".
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 AT&T, MCI, Sprint and LDDS
as well as the Regional Bell Operating Companies such as Bell Atlantic and SBC.
MCI presently represents a majority of Telegen's sales. The loss of one or more
of these relationships could have a material negative effect on Telegen's
results of operations.
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
Telegen has canceled 208,592 shares of common stock issued in August 1991
for failure of consideration. Telegen has filed an action for declaratory relief
in the United States District Court for the Northern District of California in
order to obtain court approval for such cancellation. There can be no assurance
that the cancellation effected by Telegen will be upheld by the court or that
the defendants in the proposed action will not cross-complain against Telegen in
order to rescind such cancellation and for monetary damages. See "Telegen -
Legal Matters".
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. A registration
under the Securities Act of 1933, as amended (the "1933 Act"), under state
securities laws, or under the securities laws of any other jurisdiction of the
offer and sale of the Telegen common shares in connection with the contemplated
private placement of up to 500,000 common shares is not currently intended,
apart from the registration pursuant to the terms of the Agreement. Accordingly,
the certificates representing such shares would bear a legend stating that they
are restricted securities under the 1933 Act and thus, if the Acquisition is not
consummated, the shares could not be resold or otherwise transferred unless they
are subsequently registered or an exemption from applicable registration
requirements is available.
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"), if the Acquisition is not consummated or the SEC does not approve the
related Registration Statement on Form S-4 of which this Prospectus is a part,
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.
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. There can be no assurance that at any time in the future Telegen will
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.
INTRODUCTION
This Information Statement-Prospectus is being furnished in connection with
a Special Meeting of the Shareholders of SERC to be held on July __, 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 Exhibit A 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 June __, 1996.
A principal shareholder of SERC and a member of SERC management, who
beneficially owns ______% 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.
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 Exhibit A 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, which
currently is expected to occur on or before July __, 1996, 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
April 30, 1996, there were 4,357,552 shares of Telegen common stock and 112,750
shares of Telegen Series A preferred stock issued and outstanding, as well as
options to purchase 672,730 shares of Telegen common stock at a weighted average
exercise price of $4.99 per share. In addition, Telegen is in discussion with
private parties, including domestic and foreign corporations, for the sale of up
to 500,000 additional shares, which have been reserved, for purchase prices
exceeding $5 per share. 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.
SERC California 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 placed
advertisements 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. Since 1992, management has negotiated proposals
with several companies. However, the previous proposals either did not show the
adequate promise sought by management, failed to stand up to scrutiny during due
diligence efforts, failed to establish the validity of the business concept, or
failed to demonstrate the ability of the acquisition candidate's management to
carry out the concept under the circumstances.
In June 1995, SERC placed one of its ads 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 (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.
SERC believes that Telegen will realize various benefits from the
reorganization by eliminating certain cost uncertainties 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.
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 ____% of the total issued and outstanding
shares while providing what is estimated to be a total of ______% of the total
assets of the combined companies on a proforma basis. During the negotiations,
Telegen represented to the management of SERC what it estimates its revenues and
pre-tax earnings to be for certain periods. From those estimates, SERC
determined that the estimated market value of the combined companies should be
approximately $14.50 per share on or before December 31, 1997. Based on these
estimates which the management of Telegen agreed to, the parties adopted a price
protection provision 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. If a trading market again develops for SERC's
common stock Telegen shareholders 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. The parties expect to incur significant
legal and accounting fees as part of the process of the reorganization.
Management of SERC believes that the cash presently available to it is adequate
to cover all anticipated expenses.
Summary of the Agreement
Introduction. The terms of the Acquisition are contained in the Agreement,
a copy of which is attached to this Information Statement-Prospectus as an
Appendix. 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 the
Acquisition shall be consummated as soon as practicable on or after the closing,
which is currently expected to occur on or before July 12, 1996. As soon as
practicable on or after such 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
negotiations with alternative 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 = x $14.50 - ______ (where ________ equals the number of
Bid Price SERC common shares outstanding
Factor 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.
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 August 31, 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 or
deemed applicable to the Acquisition by any governmental entity which would or
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 there
shall be any action taken, or any statute, rule, regulation or order 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 $200,000.
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 Meeting of SERC shareholders. Since
SERC's principal shareholder, who beneficially owns ______% 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. No lockup
agreements were required as a result of agreement to the Price Protection
Provisions contained in the Agreement.
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. However, the Agreement is structured
in such a fashion that: (i) the Acquisition should, among other things,
constitute a "tax-free" reorganization under Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"); and (ii) no gain or loss should
be recognized by the Telegen shareholders with respect to the SERC California
common and Series A preferred stock received as a result of the Acquisition. The
discussion below assumes such treatment for federal income tax purposes.
A Telegen shareholder who, pursuant to the acquisition, exchanges his
Telegen stock, actually owned by him or her solely for SERC California common or
Series A preferred stock will not recognize any gain or loss upon such exchange.
The aggregate tax basis of the SERC California common stock received in exchange
for the Telegen common or preferred stock will be equal to the aggregate tax
basis of the respective Telegen common or preferred stock surrendered. For the
purposes of determining long term or short term capital gain, the holding period
of the Telegen stock will be added to the holding period of the newly exchanged
SERC stock in making the determination.
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 $200,000.
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 ______% 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 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. 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 options and all
other employee benefit plans of SERC Colorado. Each outstanding and unexercised
option or other right to purchase shares of SERC Colorado Common Stock will
become an option 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 __________ shares were issued and outstanding
at the close of business on May ___, 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.
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 in the
Appendix hereto and the description of such is qualified in its entirety by
reference to the Appendix.
The Board of Directors of SERC, on January 5, 1996, 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 contained in Exhibit __ of 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 Exhibit __
attached to this Information Statement accompanying the Notice of the June __,
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 ________
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.
Only holders of record of SERC common stock on the close of business on
May __, 1996 are entitled to receive notice and to vote at the SERC Special
Meeting. As of May __, 1996, there were __________ 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 ______% 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 May __, 1996, the directors and executives officers of SERC and their
respective affiliates owned 771,772 shares of SERC common stock, representing
approximately ______% of the outstanding shares of 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 $8,750 accrued to SERC's President during 1995, no cash
compensation has been paid or accrued with respect to any SERC officer or
director since 1983. All SERC officers and directors are reimbursed by SERC for
actual out-of-pocket expenses incurred on behalf of SERC.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h)
Other
Name Annual Restricted All Other
and Compen- Stock LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($) ($) ($) SAR's(#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James B.
Wiegand,
President 1995 $8,750 $ - $ - $26,500 $ - $ - $ -
1994 $ - $ - $ - $35,000 $ - $ - $ -
1993 $ - $ - $ - $41,500 $50,000 $ - $ -
</TABLE>
All compensation is reported in the table above as valued by SERC's Board
of Directors and was paid in restricted stock at the rate of one share for each
$0.50 of compensation. Options were issued in the form of warrants to acquire
common stock at $0.50 per share. Warrants issued by SERC are valued by SERC's
Board of Directors at zero at 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."
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 negotiations with alternative 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 three months ended March 31, 1996, SERC issued 30,000
common shares to an accredited investor for $15,000. In April 1996, SERC issued
10,000 common shares in consideration of $5,000 in legal fees.
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 and therefore SERC may experience certain competitive
disadvantages compared to SERC's competitors. 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 $200,000.
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.
SERC has used its best efforts to structure the Acquisition in such a
manner as to minimize federal and state tax consequences to SERC and Telegen.
See "The Acquisition - Federal Income Tax Consequences of the Acquisition." In
the course of any merger or acquisition SERC may undertake, a substantial amount
of attention will be focused upon federal and state tax consequences to both
SERC and Telegen. Presently, under the provisions of federal and various state
tax laws, a qualified reorganization between business entities will generally
result in tax-free treatment to the parties of the reorganization. In the case
of the Acquisition, this generally requires SERC to acquire at least 80% of the
combined voting power of shares of all classes of stock in exchange for voting
stock.
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 current liquidity is dependent on the proceeds from a private
placement 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 "Telegen
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.
Under the terms of the Agreement, SERC is to advance to Telegen and
otherwise incur 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. 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
Telegen Acquisition, up to $200,000, which is the currently estimated total of
the Telegen Acquisition costs and expenses. SERC has raised $110,000 for such
costs and expenses and has firm commitments for $75,000 of the remaining
$90,000. As of March 31, 1996, SERC had paid Telegen Acquisition costs of
$114,298, which is comprised of $40,000 advanced to Telegen and $74,298 incurred
directly by SERC.
SERC is relying on its limited cash and the potential of additional private
placements of its common stock for funding completion of the Telegen
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 foreseeable needs.
During the three months ended March 31, 1996, SERC issued 30,000 shares of
its common stock for $15,000 cash. Subsequent to March 31, 1996, SERC issued
10,000 shares of its common stock in payment for $5,000 of legal fees associated
with 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 three months ended
March 31, 1996 apart from those related to the Telegen Acquisition. The increase
in expenses during the three months ended March 31, 1996 as compared to the
three months ended March 31, 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.
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
Name and Address of Beneficially % Beneficial Ownership of
Beneficial Owner Owned Outstanding Common Shares
Mark E. A. Wiegand (1,2) 2,822 _____%
615 N. Main St., Suite 678
Longmont, CO 80501
James B. Wiegand (1,2,3) 765,950 _____%
10077 E. County Line Road
Longmont, CO 80501
Janet S. Collins (1,3) 3,000 _____%
10077 E. County Line Road
Longmont, CO 80501
All Officers and Directors 771,772 _____%
as a group (3 individuals)
Norrlanska Kross, Inc. (3) 130,209 _____%
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 635,741 shares. 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.
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.
SERC plans to apply for a listing on the NASDAQ Small Cap Market and/or
other markets upon completion of the Acquisition of Telegen. Although SERC
believes that following the Acquisition it will qualify for public trading on
the NASDAQ Small Cap Market, there is no assurance by SERC that (1) it will
indeed qualify or (2) 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
1st Quarter $0.00 $0.00
2nd Quarter $0.00 $0.00
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
SERC Common Stock
Per Share Per Share
High Bid Low Bid
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
Holders
As of May ___, 1996, there were approximately 2,240 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 2,240 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. 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, and, 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. 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 one (1:1), 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 $4551.00. 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.
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."
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. The ACS 2000 is the world's first Parallel
routing device that is auto-programmed.
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. The ACS 2000 was announced in the first half of 1995 and commercial
shipments commenced in mid-1995.
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 and commercial shipments are expected to commence in
the first half of 1996.
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. Commercial shipments
are expected to commence in the first half of 1996.
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. 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 company's central office equipment to allow "equal access" by
customers to the long distance carrier of their choice without "dialing around"
by inserting the access code. 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. It is also unknown what effect, if any, proposed
telecommunications legislation on the Federal level will affect local toll
service. 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 finally
introduced.
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 manufacturer
who meets Telegen's specifications for quality. Telegen has had a manufacturing
relationship with Crystal Field since May 1991 and believes it has adequate
capacity through Crystal Field to meet Telegen's requirements for the next year.
Telegen contracts with Crystal Field on a purchase order basis without a
long-term supply arrangement. Telegen 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. Those located abroad are
cost-competitive with Crystal Field.
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 an industry that is
currently generating sales of approximately $12 billion per year, and is
estimated by industry sources to reach $19 billion annually by the year 2000.
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 1996 which could produce up to 40,000 displays per year, and to build a full
scale production plant (one million displays per year capacity) in 1997 with the
proceeds from a future funding. Further, Telegen has entered into a letter of
intent with a joint venture investment group based in Singapore for an
investment in TDL. 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.
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. The flat panel display market today generates
approximately $12 billion in sales and is predicted by industry sources to grow
to greater than $20 billion in under ten years. Since Telegen anticipates that
an HGED display may cost less than 20% of an equivalent AMLCD display, Telegen
expects to have a significant competitive advantage in a number of the flat
panel display markets.
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.
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.
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 US 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 Laboratories
are located in Foster City, California, where Telegen leases approximately
10,000 square feet of space at a cost of approximately $16,000 per month,
including common area charges. This lease will expire in August 1996. Telegen
plans to lease larger space to support its future requirements. Management
believes there is adequate space available in its immediate area for expansion,
but there can be no assurance that space can be located on favorable terms or
that Telegen will not incur significant expenses if it has to relocate to new
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 quarter of 1996 were $11,628
compared with $68,936 for the first quarter of 1995. Delays which resulted in
the MCI contract not being finalized until March 1996 significantly impacted ACS
revenues for the first quarter of 1996. In addition, the Company's TeleBlocker
product which made up the bulk of revenues for the first quarter of 1995 was
taken off the market for redesign.
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 quarter of 1996 was
$10,013 and for the first quarter of 1995 was $49,656. 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. 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 $80,466
for the first quarter of 1996 and $195,702 for the first quarter 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 quarter of
1996 were $877 compared to $55,583 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 quarter 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 quarter of 1996 were $360,534 compared with $206,133 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 quarter of
1996 was $32,665 compared with $3,850 for the first quarter 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 and, to a lesser extent,
revenues from product sales. As of March 31, 1996, Telegen had raised $7,554,779
of 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. Additionally, Telegen completed in April 1996 a private placement of
its common stock which resulted in $5.6 million in net proceeds to Telegen.
Telegen's 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.
However, Telegen's flat panel division will require significant additional
capital to move into a manufacturing phase. Telegen has entered into a letter of
intent with a joint venture investment group based in Singapore to sell 10% of
Telegen Display Laboratories, Inc. for $5 million in cash plus an option in
favor of the buyer to acquire licenses to build up to four flat panel display
production plants in exchange for up to $40 million in license fees, plus
royalties.
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.
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 April 30, 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 1,329,470 29.6%
Officer and Director
Bonnie A. Crystal Executive Vice President, 360,400 7.9%
Secretary and Director
Warren M. Dillard Chief Operating Officer, Chief 191,756 4.2%
Financial Officer and Director
Frederick T. Lezak, Jr. Director 57,000 1.3%
James R. Iverson Director 8,240 0.2%
Dennis A. Lempert General Counsel 197,798 4.5%
Larry J. Wells(3) Director 204,333 4.7%
All directors and executive
officers as a group
(7 persons) 2,348,997 48.4%
<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 April 30, 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 April 30, 1996, Telegen had 4,357,552 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
April30, 1996, Ms. Stevens, Ms. Crystal and Messrs. Dillard, Lezak,
Iverson, Lempert and Wells had the right to acquire within 60 days, from
outstanding options, 86,674 shares, 175,900 shares, 169,059 shares, 5,000
shares, 5,000 shares, 0 shares, 4,333 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 All Other
and Compen- Stock 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 $ - $ - $ - 20,004 $ - $252,000
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
</TABLE>
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.
Telegen has granted a five-year option to purchase 5% of the capital stock
of TDL after the completion of TDL's initial capitalization for $5,000 to
W. Edward Naugler, Jr., its executive vice president, in return for his
uncompensated product development efforts over the past 1 1/2 years.
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 1994, Telegen was sued by Phonex Corporation, a Utah corporation, for
patent infringement in connection with a product that Telegen allegedly intended
to market. The Phonex patents at issue pertain to the use of power wiring to
transmit telephone signals. In a complaint filed March 17, 1994, in U.S.
District Court, Northern District of California, Phonex alleged that at the
January 1993 Consumer Electronics Show, Telegen showed a product which allegedly
infringed Phonex patents. A verdict was entered in Telegen's favor on August 24,
1995, including an award of attorney's fees. Phonex filed an appeal from the
judgment on September 20, 1995.
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 letter of credit. On
September 29, 1992, Bank Sadarat filed a complaint against Telegen for
approximately $110,000 advanced under a separate letter of credit. On March 23,
1993, Telegen canceled the 208,592 shares issued to Sahara and on March 24,
1993, filed a cross-complaint for declaratory relief in the Superior Court of
the State of California for the County of San Mateo 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 canceling such shares was valid and that the persons to whom such
shares were issued have no rights as shareholders of Telegen. The case has since
been removed to the Federal District Court (Northern District, California) at
the request of Telegen. There can be no assurance as to the ultimate result of
this litigation. The number of shares and percentages of outstanding shares
referred to in this Registration Statement reflect the cancellation of shares
issued to Sahara. The monetary claim asserted by Bank Sadarat is reflected in
Telegen's Financial Statements, included elsewhere herein. Such disclosure is
not intended to be an admission or acknowledgment by Telegen with respect to the
status of the canceled shares or the monetary claim by Bank Sadarat.
In 1995, Telegen was sued by Rates Technology, Inc. ("Rates"), a New York
corporation, for infringement of patents relating to "least cost" call routing.
Rates claims that the ACS 2000 routes calls based upon the lowest cost carrier
rates. Telegen has not yet answered the complaint, but believes that the claims
made by Rates are without merit. Rates has offered to dismiss its action without
prejudice. Negotiations regarding the final disposition of this matter are
ongoing.
LEGAL MATTERS
An opinion as to the validity of the securities of SERC to be issued in
connection with the Acquisition will be given for SERC by the firm of Cohen
Brame & Smith Professional Corporation, 1700 Lincoln Street, Suite 1800, Denver,
Colorado 80203. Cohen Brame & Smith Professional Corporation owns 10,000 shares
of SERC common stock.
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 audited 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, and are included
herein in reliance on the authority of such firms as experts in accounting and
auditing.
<PAGE>
FINANCIAL INFORMATION
INDEX TO FINANCIAL STATEMENTS
Unaudited Pro Forma Condensed Statements of Operations, Year Ended
December 31, 1995 and for the Three-Month Period Ended March 31, 1996
Unaudited Pro Forma Condensed Balance Sheet, December 31, 1995 and
March 31, 1996
Solar Energy Research Corp.
Report of Independent Certified Public Accountants
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
Condensed Balance Sheets as of March 31, 1996 and December 31, 1995
(Unaudited)
Condensed Statements of Operations for the Three-Month Periods Ended
March 31, 1996 and March 31, 1995 and from January 1, 1992 (Inception)
Through March 31, 1996 (Unaudited)
Condensed Statements of Cash Flows for the Three-Month Periods Ended
March 31, 1996 and March 31, 1995 and from January 1, 1992 (Inception)
Through March 31, 1996 (Unaudited)
Notes to Condensed Financial Statements
Telegen Corporation
Report of Independent Certified Public Accountants
Statements of Operations for the Years Ended December 31,
1995 and 1994
Balance Sheet as of December 31, 1995 and 1994
Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1995 and 1994
Statement of Cash Flows for the Years Ended December 31,
1995 and 1994
Notes to Financial Statements
Balance Sheet as of March 31, 1996 and 1995 (Unaudited)
Statement of Operations for the Three-Month Periods Ended March 31,
1996 and March 31, 1995 (Unaudited)
Statement of Cash Flows for the Three-Month Periods Ended March 31,
1996 and March 31, 1995 (Unaudited)
<PAGE>
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
The only statute, charter provision, bylaw, contract, or other arrangement
under which any controlling person, director or officer of SERC or SERC
California is insured or indemnified in any manner against any liability which
he may incur in his capacity as such, is as follows:
The Colorado Business Corporation Act gives each corporation the power to
indemnify against liability any current or former directors, officers, employees
and agents. A Director must show that (1) he conducted himself in good faith,
(2) that his conduct was not opposed to the corporation's best interests, or if
acting in his official capacity, that his conduct was in the corporation's best
interests and (3) that in a criminal proceeding, he had no reasonable cause to
believe his conduct was unlawful.
The Colorado Business Corporation Act also gives each corporation the power
to eliminate or limit the personal liability of a Director to the Corporation or
its shareholders for monetary damages for breach of fiduciary duty as a director
unless the breach of fiduciary duty involves breach of loyalty to the
corporation or its shareholders, acts or omissions involving misconduct or a
knowing violation of law, acts specified in the law or any transaction whereby
the Director derived an improper personal benefit.
California law does not permit the elimination of monetary liability of
directors where such liability is based on: (a) intentional misconduct or
knowing or 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.
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 that such person is entitled to indemnity 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.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling SERC and SERC
California pursuant to the foregoing provisions, SERC and SERC California has
been informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
<PAGE>
Item 21. Exhibits and Financial Statement Schedules
Exhibit No. Title
1 Underwriting Agreement*
2 Plan of Acquisition
3 Articles of Incorporation and Bylaws
4 Instruments Defining the Rights of Holders*
5 Opinion re: Legality of Securities**
7 Opinion re: Liquidation Preference*
8 Opinion re: Tax Matters*
9 Voting Trust Agreements*
10 Material Contracts*
11 Statement re: Computation of Per Share Earnings*
12 Computation of Ratio of Earnings to Fixed Charges*
13 Annual or Quarterly Reports*
14 Material Foreign Patents*
15 Letter on Unaudited Interim Financial Information*
16 Letter on Change in Certifying Accountant*
21 Subsidiaries of SERC and Telegen
23 Consent of Experts and Counsel**
24 Power of Attorney*
25 Statement of Eligibility of Trustee*
26 Invitations for Competitive Bids*
27 Financial Data Schedules
28 Information from Reports Furnished to State Insurance
Regulatory Authorities*
99 Additional Exhibits*
* Not Applicable
** Opinion re: Legality of Securities and Consent of Counsel to be filed by
amendment.
Item 22. Undertakings
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, in the capacity and on the date indicated, thereunto
duly authorized in the City of Denver, State of Colorado.
SOLAR ENERGY RESEARCH CORP.
Signed: May 17, 1996 By: /s/ JAMES B. WIEGAND
James B. Wiegand, President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Date: May 17, 1996 By: /s/ JAMES B. WIEGAND
James B. Wiegand, President, Chief
Accounting Officer and Chairman of
the Board of Directors
Date: May 17, 1996 By: /s/ MARK E. A. WIEGAND
Mark E. A. Wiegand, Treasurer,
Chief Financial Officer and Director
Date: May 17, 1996 By: /s/ JANET S. COLLINS
Janet S. Collins, Secretary and
Director
<PAGE>
<TABLE>
<CAPTION>
Telegen Corporation (NEWCO)
Pro Forma Condensed Balance Sheet
December 31, 1995
Historical Pro forma
Solar Energy Telegen
Telegen Research (NEW CO)
Corporation Corporation Adjustments Corporation
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Current Assets
Cash $ 177,094 $ 12,509 - $ 190,413
Accounts receivable, trade 3,704 - - 3,704
Accounts receivable, other 2,186 40,000 $ (40,000) A 2,186
Inventory 377,627 - - 377,627
------- ------ -------- -------
Total current assets 561,421 52,509 (40,000) 573,930
Deferred financing cost, net 197,248 - - 197,248
Property and equipment, net 147,243 - - 147,243
Other assets 15,712 1,415 - 17,127
------- ------ -------- -------
Total assets $ 921,624 $ 53,924 $ (40,000) $ 935,548
------- ------ -------- -------
Current Liabilities
Current maturities of notes payable $ 375,473 - - $ 375,473
Current maturities of notes payable
-shareholder 279,343 - - 279,343
Accounts payable, trade 1,147,953 $ 4,228 - 1,152,181
Accounts payable, other 2,102 17,997 - 20,099
Accrued expenses 518,732 4,551 - 523,283
------- ------ -------- -------
Total current liabilities 2,323,603 26,776 - 2,350,379
Note payable-shareholder, long-term 167,649 - - 167,649
------- ------ -------- -------
Total liabilities 2,491,252 26,776 - 2,518,028
Shareholders' equity (deficit)
Series A convertible preferred stock, 922,526 - - 922,526
Common stock 2,809,703 636,925 $ (609,777) B 2,836,851
Additional paid-in capital - 954,061 (954,061) B -
Accumulated deficit (5,301,857) (1,563,838) 1,523,838 B (5,341,857)
------- ------ -------- -------
Total shareholder's deficit (1,569,628) 27,148 (40,000) (1,582,480)
Total liabilities and shareholder's
deficit $ 921,624 $ 53,924 $ (40,000) $ 935,548
------- ------ -------- -------
Telegen Corporation (NEWCO)
Pro Forma Condensed Statement of Operations
for the year ended December 31, 1995
<CAPTION>
Historical Pro forma
Solar Energy Telegen
Telegen Research (NEW CO)
Corporation Corporation 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.
<CAPTION>
Telegen Corporation (NEWCO)
Pro Forma Condensed Balance Sheet
March 31, 1996
(Unaudited)
Historical Pro forma
Solar Energy Telegen
Telegen Research (NEW CO)
Corporation Corporation Adjustments Corporation
<S> <C> <C> <C> <C>
Cash $ 4,125,607 $ 729 - $ 4,126,336
Accounts receivable, trade 11,117 - - 11,117
Accounts receivable, other 21,579 40,000 $ (40,000) A 21,579
Inventory 367,436 - - 367,436
Prepaid & other current assets - 915 - 915
---------- ------- ------ ---------
Total current assets 4,525,739 41,644 (40,000) 4,527,383
Deferred financing cost, net 142,302 500 - 142,802
Property and equipment, net 134,407 - - 134,407
Other assets 13,496 - - 13,496
---------- ------- ------ ---------
Total assets $ 4,815,944 $ 42,144 $ (40,000) $ 4,818,088
---------- ------- ------ ---------
Current Liabilities
Current maturities of notes payable $ 369,445 - - $ 369,445
Current maturities of notes payable
-shareholder 502,373 - - 502,373
Accounts payable, trade 834,022 $ 8,777 - 842,799
Accounts payable, other 461 - - 461
Accrued expenses 285,353 27,476 - 312,829
---------- ------- ------ ---------
Total current liabilities 1,991,654 36,253 - 2,027,907
Note payable-shareholder, long-term 121,772 - - 121,772
---------- ------- ------ ---------
Total liabilities 2,113,426 36,253 - 2,149,679
Shareholders' equity (deficit)
Series A convertible preferred stock, 922,526 - - 922,526
Common stock 7,554,779 651,925 $ (646,034) B 7,560,670
Additional paid in capital - 954,061 (954,061) B -
Accumulated deficit (5,774,785) (1,600,095) 1,560,095 B (5,814,785)
---------- ------- ------ ---------
Total shareholder's equity
(deficit) 2,702,520 5,891 (40,000) 2,668,411
---------- ------- ------ ---------
Total liabilities and shareholder's
deficit $ 4,815,946 $ 42,144 $ (40,000) $ 4,818,090
---------- ------- ------ ---------
The accompanying notes are an integral part of these pro forma financial statements.
<CAPTION>
Telegen Corporation (NEWCO)
Pro Forma Condensed Statement of Operations
for the three-month period ended March 31, 1996
(Unaudited)
Historical Pro forma
Solar Energy Telegen
Telegen Research (NEW CO)
Corporation Corporation Adjustments Corporation
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ 11,628 - - $ 11,628
Cost of goods sold (10,013) - - (10,013)
---------- ------- ------ ---------
Gross profit (loss) 1,615 - - 1,615
Operating expenses
Selling and marketing 877 - - 877
Research and development 80,466 - - 80,466
Proposed merger costs - $ 21,860 $ (21,860) C -
General and administrative 360,534 10,258 (10,258) C 360,534
General and administrative-related party - 3,750 (3,750) C -
Loss from operations (440,262) (35,868) 35,868 (440,262)
---------- ------- ------ ---------
Other income/(expense)
Interest income 1,757 - - 1,757
Interest expense (34,422) (389) - (34,811)
---------- ------- ------ ---------
Net loss $ (472,927) $ (36,257) $ 35,868 $ (473,316)
Weighted average shares outstanding 3,687,436 1,292,183 3,865,669
---------- ------- ------ ---------
Net loss per common and common
equivalent share $ (0.13) (0.03) $ (0.12)
---------- ------- ------ ---------
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
TELEGEN CORPORATION (NEW CO)
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS, Continued
for the year ended December 31, 1995
and the three-month period ended March 31, 1996
1. Organization and Basis of Presentation:
Solar Energy Research Corporation (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 December 31, 1995 and March 31, 1996 have been prepared as if
the acquisition and the reorganization transactions had been consummated at
December 31, 1995 and March 31, 1996, respectively. The pro forma income
statement for the year ended December 31, 1995 and the three-month period ended
March 31, 1996 have been prepared as if the acquisition and the reorganization
transactions had been consummated at January 1, 1995. 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 March 31, 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
March 31, 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.
1. Organization and Basis of Presentation, continued:
The unaudited pro forma financial statements are not necessarily indicative
of what the actual financial position would have been at December 31, 1995 or at
March 31, 1996, nor of the actual results of operations for the year ended
December 31, 1995 or the three-month period ended March 31, 1996, had the
acquisition and the reorganization transactions occurred on December 31, 1995,
March 31, 1996 and January 1, 1995, 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 2,833,513 shares for Telegen.
(b) Pro forma net income per share information for the three-month period
ended March 31, 1996 is calculated using weighted average shares outstanding of
178,232 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 3,868,231 shares for Telegen.
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 the
SERC's net assets (pre acquisition) of $27,148 and $5,891 at December 31, 1995,
and March 31, 1995, 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 March 31, 1995.
(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 February 1996, Telegen 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 receive 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. As of March 31, 1996, Telegen issued an additional 578,000 common
shares from the private placement. As of April 1996, Telegen issued an
additional _724,150 common shares from the private placement and granted 136,000
common shares to the placement agent.
In April 1996, SERC received $5,000 in legal services in exchange for
10,000 shares of its common stock.
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
with
INDEPENDENT AUDITORS' REPORT
December 31, 1995
Item 7. Consolidated Financial Statements
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
Index to Consolidated Financial Statements
PAGE
Independent auditors' report.................................. F-2
Consolidated balance sheet as of December 31, 1995............ F-3
Consolidated statements of operations, for the years ended
December 31, 1995 and 1994 and from January 1, 1992
(inception) through December 31, 1995...................... F-4
Consolidated statements of cash flows, for the years ended
December 31, 1995 and 1994 and from January 1, 1992
(inception) through December 31, 1995...................... F-5
Consolidated statements of shareholders' equity,
January 1, 1992 (inception) through December 31, 1995....... F-7
Summary of significant accounting policies.................... F-9
Notes to consolidated financial statements.................... F-10
F-1
<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>
F-2
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.
F-3
<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.
F-4
<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.
F-5
<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.
F-6
<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.
F-7
<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.
F-8
<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.
F-9
<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.
F-10
<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.
F-11
<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.
F-12
<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.
F-13
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(a Development Stage Enterprise)
Part I. Item 1. Financial information
Condensed Balance Sheets
ASSETS
March 31, December 31,
1996 1995
Assets
Cash.................................... $ 729 $ 12,509
Advances to merger candidate............ 40,000 40,000
Organization costs...................... 915 915
Deferred offering costs................. 500 500
$ 42,144 $ 53,924
____________ ___________
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable........................ $ 8,777 $ 4,228
Other current liabilities............... 27,476 22,548
____________ ___________
Total liabilities.................... 36,253 26,776
____________ ___________
Shareholders' equity
Common stock............................ 651,925 636,925
Other shareholders' deficit.......... (646,034) (609,777)
____________ ___________
Total shareholders' equity............ 5,891 27,148
____________ ___________
$ 42,144 $ 53,924
____________ ____________
See accompany notes to financial statements.
F-14
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(a Development Stage Enterprise)
Condensed Statements of Operations
January 1,
1992
Three Months Ended Through
March 31, March 31,
1996 1995 1996
Costs and expenses
General and administrative,
related parties.......... $ 3,750 $ - $ 133,584
General and administrative. 10,258 3,737 44,290
Costs of proposed
acquisition.............. 21,860 - 74,298
Interest expense........... 389 389 4,940
36,257 4,126 257,112
Net loss..................... $ (36,257) $ (4,126) $ (257,112)
____________ ____________ ____________
Weighted average shares
outstanding................ 1,292,183 1,008,759 416,150
____________ ____________ ____________
Net loss per share........... $ (0.03) $ * $ (0.62)
____________ ____________ ____________
* Less than $0.01
See accompany notes to financial statements.
F-15
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(a Development Stage Enterprise)
Condensed Statements of Cash Flows
January 1,
1992
Three Months Ended Through
March 31, March 31,
1996 1995 1996
Cash flows from operating
activities:
Cash used in operating
activities............... $ (26,780) $ - $ (109,271)
____________ ____________ ____________
Cash flows from financing
activities:
Sale of common stock....... 15,000 - 110,000
____________ ____________ ____________
Cash provided by financing
activities... 15,000 - 110,000
____________ ____________ ____________
Net increase (decrease) in
cash and cash equivalents... (11,780) - 729
Cash and cash equivalents at
beginning of period......... 12,509 - -
____________ ____________ ____________
Cash and cash equivalents at
end of period............... $ 729 $ - $ 729
____________ ____________ ____________
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
Shares issued for services $ - $ - $ 66,750
See accompany notes to financial statements.
F-16
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(a Development Stage Enterprise)
Condensed Statements of Cash Flows, Concluded
January 1,
1992
Three Months Ended Through
March 31, March 31,
1996 1995 1996
Noncash financing activities,
continued:
Shares issued for
compensation:
President............. $ - $ - $ 102,750
Secretary............. $ - $ - $ 1,500
See accompany notes to financial statements.
F-17
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(a Development Stage Enterprise)
Notes to Condensed Financial Statements
March 31, 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: Shareholders' equity
An unconsolidated affiliate advanced the Company cash totalling $382 for
the three months ended March 31, 1996. During the three months ended March 31,
1996, the Company issued 30,000 shares of its $.50 par value common stock to an
accredited investor for $15,000 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.
Note C: Subsequent event
On April 3, 1996, the Company issued 10,000 shares of its $.50 par value
common stock for payment of $5,000 in legal fees.
TELEGEN CORPORATION
REPORT ON AUDITS OF FINANCIAL STATEMENTS
for the years ended December 31, 1995 and 1994
TELEGEN CORPORATION
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants F-1
Balance Sheets as of December 31, 1995 and 1994 F-2
Statements of Operations for the years ended
December 31, 1995 and 1994 F-3
Statements of Shareholders' Equity (Deficit) for the years ended
December 31, 1995 and 1994 F-4
Statements of Cash Flows for the years ended
December 31, 1995 and 1994 F-5
Notes to Financial Statements F-6
<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.
Sacramento, California Coopers & Lybrand, L.L.P.
April 19, 1996
F-1
<PAGE>
TELEGEN CORPORATION BALANCE SHEETS
as of December 31, 1995 and 1994
ASSETS
1995 1994
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
------- -------
The accompanying notes are an integral part of these financial statements
F-2
<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
F-3
<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)
------- ------- --------- --------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
<PAGE>
TELEGEN CORPORATION STATEMENTS OF CASH FLOWS
for the years ended December 31, 1995 and 1994
1995 1994
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
--------- -------
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
TELEGEN CORPORATION BALANCE SHEET AS OF MARCH 31, 1996
(unaudited)
ASSETS
CURRENT ASSETS:
CASH EQUIVALENTS $ 4,125,607.00
ACCT REC TRADE $ 11,117.00
ACCT REC OTHER $ 21,579.00
INVENTORY $ 367,436.00
_____________
TOTAL CURRENT ASSETS $ 4,525,739.00
PROPERTY & EQUIPMENT (NET) $ 134,407.00
OTHER ASSETS $ 155,800.00
_____________
$ 4,815,946.00
_____________
_____________
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT MAT. NOTES PAYABLE $ 871,818.00
TRADE ACCOUNTS PAYABLE $ 834,022.00
ACCOUNTS PAYABLE OTHER $ 461.00
ACCRUED EXPENSES $ 285,353.00
_____________
TOTAL CURRENT LIABILITIES $ 1,991,654.00
NOTES PAYABLE LONG TERM $ 121,772.00
_____________
TOTAL LIABILITIES $2,113,426.00
_____________
SHAREHOLDERS' EQUITY
SERIES A CONVERTIBLE
PREFERRED STOCK $ 922,526.00
COMMON STOCK $ 7,554,779.00
ACCUMULATED DEFICIT $(5,774,785.00)
_____________
TOTAL SHAREHOLDERS' EQUITY $ 2,702,520.00
$ 4,815,946.00
_____________
_____________
<PAGE>
TELEGEN CORPORATION CORPORATION BALANCE SHEET AS OF 3/31/95
(unaudited)
ASSETS
CURRENT ASSETS:
CASH EQUIVALENTS $ 29,300.00
ACCT REC TRADE $ 41,614.00
ACCT REC OTHER $ 21,343.00
INVENTORY $ 97,899.00
_____________
TOTAL CURRENT ASSETS $ 190,156.00
PROPERTY & EQUIPMENT (NET) $ 191,380.00
OTHER ASSETS $ 31,242.00
_____________
$ 412,778.00
_____________
_____________
LIABILITIES & SHAREHOLDERS EQUITY
CURRENT LIABILITIES:
CURRENT MAT. NOTES PAYABLE $ 413,198.00
TRADE ACCOUNTS PAYABLE $ 285,284.00
ACCOUNTS PAYABLE OTHER $ 6,888.00
ACCRUED EXPENSES $ 337,723.00
_____________
TOTAL CURRENT LIABILITIES $ 1,043,093.00
NOTES PAYABLE LONG TERM $ --
_____________
TOTAL LIABILITIES $ 1,043,093.00
_____________
SHAREHOLDER'S EQUITY
SERIES A CONVERTIBLE
PREFERRED STOCK $ 421,447.00
COMMON STOCK $ 2,174,157.00
ACCUMULATED DEFICIT $ (3,225,919.00)
_____________
TOTAL SHAREHOLDER'S EQUITY $ (630,315.00)
_____________
$ 412,778.00
_____________
_____________
<PAGE>
TELEGEN CORPORATION STATEMENT OF OPERATIONS 1/1/96-3/31/96
(unaudited)
SALES $ 11,628.00
COST OF GOODS $ 10,013.00
___________
GROSS PROFIT $ 1,615.00
OPERATING EXPENSE:
SALES & MARKET $ 877.00
RESEARCH & DEV $ 80,466.00
GEN & ADMIN $ 360,534.00
___________
LOSS FROM OPER $ (440,262.00)
OTHER INC & EXP
INTEREST INC $ 1,757.00
INTEREST EXP $ 34,422.00
___________
LOSS BEFORE TAXES $ (472,927.00)
PROVISION FOR TAXES $ --
___________
NET LOSS $ (472,927.00)
___________
___________
<PAGE>
TELEGEN CORPORATION STATEMENT OF OPERATIONS 1/1/95-3/31/95
(unaudited)
SALES $ 68,936.00
COST OF GOODS $ 49,656.00
___________
GROSS PROFIT $ 19,280.00
OPERATING EXPENSE:
SALES & MARKET $ 55,583.00
RESEARCH & DEV $ 195,702.00
GEN & ADMIN $ 206,133.00
___________
LOSS FROM OPER $ (438,138.00)
OTHER INC & EXP
INTEREST INC $ 119.00
INTEREST EXP $ 3,969.00
___________
LOSS BEFORE TAXES $ (441,988.00)
PROVISION FOR TAXES $ --
___________
NET LOSS $ (441,988.00)
___________
___________
<PAGE>
TELEGEN CORPORATION STATEMENT OF CASH FLOWS FOR THE QUARTER ENDING 3/31/96
(Unaudited)
CASH FLOW FROM OPERATING ACTIVITIES
NET LOSS $ (472,927.00)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH USED IN OPERATING ACTIVITIES:
DEPRECIATION $ 14,696.00
AMORTIZATION $ 2,217.00
AMORTIZATION OF DEFERRED FINANCE COST $ 54,944.00
OPERATING EXPENSES PAID WITH
ISSUANCE OF COMMON STOCK $ 42,251.00
INTEREST EXPENSE ADDED TO NOTE PAYABLE $ 11,917.00
CHANGES IN ASSETS & LIABILITIES
DECREASE (INCREASE) IN ACCOUNTS RECEIVABLE $ (26,806.00)
DECREASE (INCREASE) IN INVENTORY $ 10,191.00
DECREASE (INCREASE) OTHER ASSETS $ --
INCREASE (DECREASE) IN ACCOUNTS PAYABLE $ (315,573.00)
INCREASE (DECREASE) IN ACCRUED EXPENSES $ (233,379.00)
TOTAL ADJUSTMENTS $ (439,542.00)
NET CASH USED IN OPERATING ACTIVITIES $ (912,469.00)
CASH FLOWS USED IN FINANCING ACTIVITIES:
PURCHASE OF FIXED ASSETS $ (1,860.00)
PURCHASE OF INTANGIBLE ASSETS $ --
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ (1,860.00)
CASH FLOWS FROM FINANCING ACTIVITIES:
NET PROCEEDS FROM BORROWINGS $ 207,900.00
PRINCIPAL PAYMENTS ON NOTES PAYABLE $ (48,692.00)
ISSUANCE OF COMMON STOCK $ 4,702,824.00
ISSUANCE OF PREFERRED STOCK, NET OF OFFERING COSTS $ --
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 4,862,032.00
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS $ 3,947,703.00
CASH & CASH EQUIVALENTS AT BEGINNING OF QUARTER $ 177,904.00
CASH & CASH EQUIVALENTS AT END OF QUARTER $ 4,125,607.00
SUPPLEMENTAL DISCLOSURES:
CASH PAID FOR INTEREST $ --
CASH PAID FOR INCOME TAXES $ --
<PAGE>
TELEGEN CORPORATION STATEMENT OF CASH FLOWS FOR THE QUARTER ENDING 3/31/95
(unaudited)
CASH FLOW FROM OPERATING ACTIVITIES
NET LOSS $ (441,988.00)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH USED IN OPERATING ACTIVITIES:
DEPRECIATION $ 14,696.00
AMORTIZATION $ 3,317.00
AMORTIZATION OF DEFERRED FINANCE COST $ --
OPERATING EXPENSES PAID WITH
ISSUANCE OF COMMON STOCK $ 6,610.00
INTEREST EXPENSE ADDED TO NOTE PAYABLE $ 3,871.00
CHANGES IN ASSETS & LIABILITIES
DECREASE (INCREASE) IN ACCOUNTS RECEIVABLE $ (34,572.00)
DECREASE (INCREASE) IN INVENTORY $ 47,391.00
DECREASE (INCREASE) OTHER ASSETS $ 22,466.00
INCREASE (DECREASE) IN ACCOUNTS PAYABLE $ (48,466.00)
INCREASE (DECREASE) IN ACCRUED EXPENSES $ 142,266.00
TOTAL ADJUSTMENTS $ 157,579.00
NET CASH USED IN OPERATING ACTIVITIES $ (284,409.00)
CASH FLOWS USED IN FINANCING ACTIVITIES:
PURCHASE OF FIXED ASSETS $ 12,451.00
PURCHASE OF INTANGIBLE ASSETS $ --
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ 12,451.00
CASH FLOWS FROM FINANCING ACTIVITIES:
NET PROCEEDS FROM BORROWINGS $ 56,985.00
PRINCIPAL PAYMENTS ON NOTES PAYABLE $ --
ISSUANCE OF COMMON STOCK $ 55,805.00
ISSUANCE OF PREFERRED STOCK, NET OF OFFERING COSTS $ 70,743.00
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 183,533.00
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS $ (88,425.00)
CASH & CASH EQUIVALENTS AT BEGINNING OF QUARTER $ 117,725.00
CASH & CASH EQUIVALENTS AT END OF QUARTER $ 29,300.00
SUPPLEMENTAL DISCLOSURES:
CASH PAID FOR INTEREST $ 98.00
CASH PAID FOR INCOME TAXES $ --
<PAGE>
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.
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:
The Company received approximately $217,000 and $166,000 in legal services,
$7,900 and $37,000 in employee services, $49,500 and $0 in deferred financing
costs and $61,000 and $19,000 in other services in exchange for common stock
during 1995 and 1994, respectively. In addition, approximately $3,300 and
$52,000 in accounts payable were exchanged for common stock during 1995 and
1994, respectively. Furthermore, 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 $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.
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.
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>
AGREEMENT AND PLAN OF REORGANIZATION
SOLAR ENERGY RESEARCH CORP.
TELEGEN CORPORATION
AGREEMENT AND PLAN OF REORGANIZATION
SOLAR ENERGY RESEARCH CORP.
TELEGEN CORPORATION
This Agreement and Plan of Reorganization is entered into this 16th day of
November 1995, by and among Solar Energy Research Corp., a Colorado corporation
(the "Acquiror"), Telegen Corporation, a California corporation ("Telegen"), and
Telegen Acquisition Corporation, a California corporation and wholly-owned
subsidiary of Acquiror ("Merger Sub").
RECITALS
A. The Boards of Directors of each of the Acquiror, Telegen, and Merger Sub
believe it to be in the best interests of each such company and each such
company's respective shareholders that Telegen and Merger Sub combine into a
single company through the statutory merger of Merger Sub with and into Telegen
(the "Merger") and, in furtherance thereof, have approved the Merger.
B. Pursuant to the Merger, among other things, all the outstanding shares
of Common Stock of Telegen ("Telegen Common") will be converted into shares of
Common Stock of Acquiror, par value $.50 per share ("Acquiror Common"), and all
the outstanding shares of Preferred Stock of Telegen ("Telegen Preferred") will
be converted into shares of Preferred Stock of Acquiror ("Acquiror Preferred"),
at the rate determined herein.
C. Telegen, the Acquiror, and Merger Sub wish to make certain
representations and other agreements in connection with the Merger.
D. The parties intend that this Plan of Reorganization be a reorganization
within the meaning of Section 368(a)(1)(B) of the Internal Revenue Code of 1986,
as amended.
In order to consummate such plan of reorganization, the parties hereto, in
consideration of the mutual agreements and on the basis of the representations
and warranties hereinafter set forth, do hereby agree as follows:
ARTICLE
THE MERGER
Section . The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement, an Agreement of
Merger to be prepared consistent with this Agreement (the "Merger Agreement"),
and the applicable provisions of the General Corporation Law of the State of
California ("California Law"), Merger Sub shall be merged with and into Telegen,
the separate corporate existence of Merger Sub shall cease, and Telegen shall
continue as the surviving corporation. Telegen as the surviving corporation
after the Merger is hereinafter sometimes referred to as the "Surviving
Corporation."
Section . Effective Time of the Merger. As soon as practicable on or after
the Closing Date (as defined in Article 2), the parties hereto shall cause the
Merger to be consummated by filing the Merger Agreement and required officers'
certificates with the Secretary of State of California in such form as required
by and executed in accordance with the relevant provisions of California Law
(the "Merger Documents"). The Merger shall become effective as of the time and
date such Merger Documents are so filed (the "Effective Time").
Section . Effect of the Merger. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of California Law.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time, all rights, privileges, powers, and franchises of Merger Sub
shall vest in the Surviving Corporation, and all debts, liabilities, and duties
of Merger Sub shall become the debts, liabilities, and duties of the Surviving
Corporation.
Section . Articles of Incorporation; Bylaws.
(a) At the Effective Time, the Amended and Restated Articles of
Incorporation of Telegen, as in effect immediately prior to the Effective Time
(the "Telegen Articles"), shall be the Articles of Incorporation of the
Surviving Corporation until thereafter amended as provided by California Law and
such Articles of Incorporation.
(b) The Bylaws of Telegen, as in effect immediately prior to the Effective
Time (the "Telegen Bylaws"), shall be the Bylaws of the Surviving Corporation
until thereafter amended.
Section 1.5. Directors and Officers. The director(s) of Telegen immediately
prior to the Effective Time shall be the director(s) of the Surviving
Corporation, each to hold office in accordance with the Articles of
Incorporation and Bylaws of the Surviving Corporation, and the officers of
Telegen immediately prior to the Effective Time shall be the initial officers of
the Surviving Corporation, in each case until their respective successors are
duly elected or appointed and qualified.
Section 1.6 Effect on Capital Stock. As of the Effective Time, by virtue of
the Merger, and without any action on the part of the holder of any shares of
the issued and outstanding shares of Telegen Common or Telegen Preferred:
(a) Cancellation of Acquiror-Owned and Telegen-Owned Stock. All shares of
Telegen Common or Telegen Preferred that are owned directly or indirectly by
Telegen or any subsidiary of Telegen, or by Acquiror or any subsidiary of
Acquiror, shall be cancelled and extinguished, and no stock of the Acquiror or
other consideration shall be delivered in exchange therefor.
(b) Conversion of Telegen Common and Telegen Preferred. Other than shares
to be cancelled pursuant to Section 1.6(a) above, Dissenting Shares (as defined
in Section 1.7(a) below), and fractional shares, if any, as provided in Section
1.6(e) below, each share of Telegen Common issued and outstanding immediately
prior to the Effective Time shall be cancelled and extinguished and shall be
converted automatically, without any action on the part of the holder thereof,
into the right to receive 7.25 shares of Acquiror Common (the "Common Exchange
Ratio"), and each share of Telegen Preferred issued and outstanding immediately
prior to the Effective Time shall be converted automatically, without any action
on the part of the holder thereof, into the right to receive 7.25 shares of
Acquiror Preferred (the "Preferred Exchange Ratio"), respectively, each upon
surrender in the manner provided in Section 1.8 hereof of the certificate
representing such shares of Telegen Common or Telegen Preferred. The Common
Exchange Ratio and the Preferred Exchange Ratio are referred to collectively
herein as the "Exchange Ratios."
(c) Capital Stock of Merger Sub. Each share of common stock of Merger Sub
issued and outstanding immediately prior to the Effective Time shall be
converted into and exchanged for one validly issued, fully paid, and
nonassessable share of common stock, without par value, of the Surviving
Corporation.
(d) Adjustments to Exchange Ratios. The Exchange Ratios shall be adjusted
to reflect fully the effect of any stock split, reverse stock split, stock
dividend (including any dividend or distribution of securities convertible into
Acquiror Common or Telegen Common), reorganization, recapitalization, or other
like change with respect to Acquiror Common, Acquiror Preferred, Telegen Common,
or Telegen Preferred occurring after the date hereof and prior to the Effective
Time.
(e) Fractional Shares. No fractional shares of Acquiror Common shall be
issued, but in lieu thereofe, each holder of shares of Telegen Common or Telegen
Preferred who would otherwise be entitled to receive a fraction of a share of
Acquiror Common or Acquiror Preferred (after aggregating all fractional shares
of Acquiror Common or Acquiror Preferred to be received by such holder) shall be
entitled to receive from Acquiror a whole share, as the case may be, of Acquiror
Common or Acquiror Preferred.
Section 1.7 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary, any
shares ("Dissenting Shares") of Telegen's capital stock held by a holder
("Dissenting Shareholder") who has demanded and perfected dissenter's rights for
such shares in accordance with Chapter 13 of California Law and who, as of the
Effective Time, has not effectively withdrawn or lost such dissenter's rights,
shall not be converted into Acquiror Common or Acquiror Preferred, as the case
may be, pursuant to Section 1.6(b), and the holder thereof shall only be
entitled to such rights as are granted by California Law.
(b) Notwithstanding the provisions of subsection (a) above, if any
Dissenting Shareholder shall effectively withdraw or lose (through failure to
perfect or otherwise) the right to dissent, then, as of the later of the
Effective Time and the occurrence of such event, such holder's shares shall
automatically be converted into and represent only the right to receive the
shares of Acquiror Common or Acquiror Preferred to which such Dissenting
Shareholder is then entitled under this Agreement and California Law, without
interest thereon and upon surrender of the certificate representing such shares.
Section 1.8 Exchange of Certificates.
(a) Exchange Agent. Prior to the Effective Time, Acquiror shall appoint
United Stock Transfer, Inc. to act as exchange agent (the "Exchange Agent") in
the Merger.
(b) Acquiror to Provide Stock. Promptly after the Effective Time, Acquiror
shall make available to the Exchange Agent for exchange in accordance with this
Article 1, the shares of Acquiror Common and Acquiror Preferred issuable
pursuant to Section 1.6 in exchange for outstanding shares of Telegen Common and
Telegen Preferred.
(c) Exchange Procedures. As soon as practicable after the Effective Time,
the Exchange Agent shall mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding shares of Telegen Common or Telegen Preferred (the "Certificates")
whose shares were converted into Acquiror Common or Acquiror Preferred pursuant
to Section 1.6, (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent and shall be in
such form and have such other provisions as Acquiror may reasonably specify) and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for Acquiror Common or Acquiror Preferred, as the case may be. Upon
surrender of a Certificate for cancellation to the Exchange Agent or to such
other agent or agents as may be appointed by Acquiror, together with such letter
of transmittal, duly executed, and subject to the requirements and restrictions
of any other agreement entered into between Acquiror and any holder of Telegen
Common or Telegen Preferred on or before the Effective Time, the holder of such
Certificate shall be entitled to receive in exchange therefor the number of
whole shares of Acquiror Common or Acquiror Preferred to which the holder of
Telegen Common or Telegen Preferred is entitled pursuant to Section 1.6 and is
represented by the Certificate so surrendered. The Certificate so surrendered
shall forthwith be cancelled. Until surrendered as contemplated by this Section
1.8, each outstanding Certificate that, prior to the Effective Time, represented
Telegen Common or Telegen Preferred shall be deemed from and after the Effective
Time, for all corporate purposes to represent solely the right to receive upon
such surrender the number of shares of Acquiror Common or Acquiror Preferred as
provided by this Agreement and the provisions of California Law.
(d) Distributions With Respect to Unexchanged Shares. No dividends or other
distributions declared or made after the Effective Time with respect to Acquiror
Common or Acquiror Preferred with a record date after the Effective Time will be
paid to the holder of any unsurrendered Certificate with respect to the shares
of Acquiror Common or Acquiror Preferred represented thereby until the holder of
record of such Certificate shall surrender such Certificate. Subject to
applicable law, following surrender of any such Certificate, there shall be paid
to the record holder of the certificates representing whole shares of Acquiror
Common or Acquiror Preferred issued in exchange therefor, without interest, at
the time of such surrender, the amount of dividends or other distributions with
a record date after the Effective Time theretofore paid with respect to such
whole shares of Acquiror Common or Acquiror Preferred.
(e) No Liability. Notwithstanding anything to the contrary in this Section
1.8, none of the Exchange Agent, the Surviving Corporation, or any party hereto
shall be liable to a holder of shares of Acquiror Common, Acquiror Preferred,
Telegen Common, or Telegen Preferred for any amount properly paid to a public
official pursuant to any applicable abandoned property, escheat, or similar law.
Section 1.9 No Further Ownership Rights in Telegen Common or Telegen
Preferred. All Acquiror Common or Acquiror Preferred delivered upon the
surrender for exchange of shares of Telegen Common or Telegen Preferred in
accordance with the terms hereof shall be deemed to have been delivered in full
satisfaction of all rights pertaining to such shares of Telegen Common or
Telegen Preferred. There shall be no further registration of transfers on the
stock transfer books of the Surviving Corporation of the shares of Telegen
Common or Telegen Preferred which were outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates are presented to the
Surviving Corporation for any reason, they shall be cancelled and exchanged as
provided in this Article 1.
Section 1.10 Lost, Stolen or Destroyed Certificates. In the event any
certificates evidencing shares of Telegen Common or Telegen Preferred shall have
been lost, stolen, or destroyed, the Exchange Agent shall issue in exchange for
such lost, stolen, or destroyed certificates, upon the making of an affidavit of
that fact by the holder thereof, such shares of Acquiror Common as may be
required pursuant to Section 1.6; provided, however, that Acquiror may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen, or destroyed certificates to deliver a bond in such
sum as it may reasonably direct as indemnity against any claim that may be made
against Acquiror or Exchange Agent with respect to the certificates alleged to
have been lost, stolen, or destroyed.
Section 1.11 Telegen Options. By virtue of the Merger and without any
further action on the part of any person or entity, options to acquire shares of
the Telegen Common outstanding immediately prior to the Effective Time (the
"Telegen Options") will be treated as follows:
(a) Each separate Telegen Option will be converted into a separate option,
each a "New Acquiror Option," and collectively, the "New Acquiror Options," to
purchase a number of shares of Acquiror Common equal to the product of the
number of shares of Telegen Common for which such Telegen Option was exercisable
immediately prior to the Effective Time (without regard to vesting provisions,
if any) multiplied by the Common Exchange Ratio. The aggregate exercise price
for any shares of Acquiror Common covered by each such New Acquiror Option will
be equal to the aggregate exercise price for any shares of Telegen covered by
such Telegen Option. The per-share exercise price for each New Acquiror Option
will equal the aggregate exercise price of such option divided by the number of
shares of Acquiror Common issuable in connection with such New Acquiror Option.
All of the other terms and conditions of such New Acquiror Option will be
identical to the terms and conditions of such Telegen Option immediately prior
to the Effective Time. The intention of such conversion is for Acquiror to
assume the Telegen Options to the extent such Telegen Options are not exercised
prior to the Closing Date.
(b) Notwithstanding the foregoing, no New Acquiror Option will be
exercisable with respect to fractional shares of Acquiror Common. In lieu
thereof, the number of shares otherwise issuable under any New Acquiror Option
shall be rounded up to the next whole number.
Section 1.12 Tax Consequences. It is intended by the parties hereto that
the Merger shall constitute a reorganization within the meaning of Section 368
of the Internal Revenue Code of 1986, as amended. The parties to this Agreement
hereby adopt this Agreement as a "plan of reorganization" within the meaning of
Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations. No
party shall take any action that would cause the Merger to fail to qualify as
such a reorganization.
Section1.13. Taking of Necessary Action; Further Action. If, at any time
after the Effective Time, any such further action is necessary or desirable to
carry out the purposes of this Agreement and to vest the Surviving Corporation
with full right, title, and possession to all assets, property, rights,
privileges, powers and franchises of Telegen and Merger Sub, the officers and
directors of Telegen and Merger Sub shall be fully authorized in the name of
their respective corporations or otherwise to take, and will take, all such
lawful and necessary action.
ARTICLE
CLOSING
Section 2.1 The Closing and the Closing Date. The closing (the "Closing")
shall be held at the offices of Cohen Brame & Smith, Professional Corporation,
at 10:00 a.m. on January 15, 1996, or such other date as the parties shall agree
following the receipt of a permit from the California Department of Corporations
qualifying the issuance of the Acquiror Common and Acquiror Preferred pursuant
to Section 25110 of California Law (the "Closing Date").
Section 2.2 Filing Date. Subject to the provisions of this Agreement, on
the Closing Date, the Merger Documents shall be filed with the Secretary of
State of California, all in accordance with the provisions of this Agreement,
the Merger Agreement, and California Law.
ARTICLE
REPRESENTATIONS AND WARRANTIES
Section 3.1 Representations and Warranties by Telegen. As a material
inducement to the Acquiror to execute and perform its obligations under this
Agreement, Telegen represents and warrants to the Acquiror, subject to the
exceptions specifically disclosed in the schedules, referencing the appropriate
section number, delivered by Telegen to Acquiror prior to signing this Agreement
(the "Telegen Schedules") as follows:
(a) Organization and Standing of Telegen. Telegen is a corporation duly
organized and validly existing and in good standing under the laws of the State
of California. It has all requisite corporate power and authority to carry on
its business as now being conducted, to enter into this Agreement, and to carry
out and perform the terms and provisions of this Agreement. Telegen is duly
qualified to do business and is in good standing in each jurisdiction in which
the failure to be so qualified would have a material adverse effect on the
condition (financial or otherwise),business, net worth, assets (including
intangible assets), properties or operations ("Material Adverse Effect") of
Telegen. Telegen has no subsidiaries and, further, has no direct or indirect
interest, either by way of stock ownership or otherwise, in any other firm,
corporation, association, or business other than as disclosed in Schedule
3.1(a).
(b) (i) Capitalization and Indebtedness for Borrowed Moneys. Telegen is
duly and lawfully authorized by the Telegen Articles to issue 10,000,000 shares
of Telegen Common, no par value per share, of which 2,713,061 shares are validly
issued and outstanding on the date of this Agreement. Telegen has no treasury
stock. Further, Telegen has authorized 2,000,000 shares of Telegen Preferred, of
which 550,000 shares have been designated as Series A Preferred Stock. 112,750
shares of Series A Preferred Stock are issued and outstanding. All the
outstanding shares of Telegen Common and Telegen Preferred have been duly
authorized and validly issued and are fully paid and nonassessable.
(ii) Telegen is not presently liable on account of any indebtedness for
borrowed moneys, except as reflected in the financial statements described in
subparagraph (e) below. The borrowed indebtedness of Telegen as of the Closing
Date is set forth in Schedule 3.1(b)(ii).
(iii) Except for conversion rights of Telegen Preferred, there are no
outstanding subscriptions, options, warrants, calls, contracts, demands,
commitments, convertible securities, or other agreements or arrangements of any
character or nature whatever under which Telegen is or may be obligated to issue
or purchase shares of its capital stock, other than options to purchase 486,200
shares of Telegen Common at a weighted average exercise price of $4.86 per share
issued to then-current employees of Telegen in connection with their performance
of services.
(c) Ownership of Telegen Common and Telegen Preferred. Schedule 3.1(c) sets
forth a complete and accurate list of all issued and outstanding shares of
Telegen Common and Telegen Preferred and outstanding warrants, options, or
similar rights to acquire Telegen Common or Telegen Preferred and the names of
the holders thereof.
(d) Telegen's Authority. Telegen has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery, and performance of this Agreement
has been duly authorized by all requisite corporate action. This Agreement has
been duly executed and delivered by Telegen and constitutes a valid and binding
obligation of Telegen enforceable in accordance with its terms (except as
limited by bankruptcy, insolvency, or other laws affecting the enforcement of
creditors' rights). The execution and delivery of this Agreement by Telegen and
the consummation of the transactions contemplated hereby will not conflict with
or result in any violation of or default under (with or without notice or lapse
of time or both) or give right to a right of termination, cancellation,
acceleration of any obligation or to loss of a material benefit under (i) any
provision of the Telegen Articles or the Telegen Bylaws or (ii) any mortgage,
indenture, lease, contract, or other agreement or instrument, permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Telegen or its properties or assets.
No consent, approval, order, or authorization of, or registration, declaration
or filing with, any court, administrative agency or commission or other
governmental authority or instrumentality ("Governmental Entity") is required by
or with respect to Telegen in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby and
thereby, except for (i) the filing of the Merger Documents with the Secretary of
State of California and the filing of appropriate documents with the relevant
authorities of other states in which Telegen is qualified to do business and
(ii) such consents, approvals, orders, authorizations, registrations,
declarations, and filings as may be required under applicable state securities
laws, including the filing of the permit application contemplated by Section
4.3.
(e) Financial Statements. Telegen has furnished the Acquiror with unaudited
financial statements of Telegen as of December 31, 1994 and September 30, 1995,
and audited financial statements as of December 31, 1992 and 1993. All such
financial statements present fairly the financial condition of Telegen at such
date, and the results of its operations for the period therein specified, and
the audited Financial Statements were prepared in accordance with generally
accepted accounting principles applied upon a basis consistent with prior
accounting periods. Telegen's unaudited balance sheet at September 30, 1995 is
hereinafter referred to as the "Telegen Balance Sheet," and all such financial
statements are hereinafter referred to as the "Telegen Financial Statements."
Except as set forth in Schedule 3.1(g), Telegen has no liabilities or
obligations, fixed, contingent, or otherwise not reflected on the Telegen
Balance Sheet, except for (i) liabilities incurred in the ordinary course
business since the date of the Telegen Balance Sheet which in the aggregate do
not exceed $10,000 and which in the aggregate do not exceed $50,000 and are
usual and normal for Telegen and (ii) liabilities and obligations as may have
arisen in the ordinary course of business prior to the date of the Telegen
Balance Sheet which under generally accepted accounting principles were not
required to be reflected on the Telegen Balance Sheet and which individually do
not exceed $25,000.
(f) Present Status. Since the date of the Telegen Balance Sheet (or such
other date specifically set forth herein), except as otherwise contemplated by
this Agreement and except as described in Schedule 3.1(f), Telegen has conducted
its business only in the ordinary and usual course and, without limiting the
generality of the foregoing:
(i) Telegen has not sustained any damage, destruction, or loss by reason of
fire, explosion, earthquake, casualty, labor trouble (including but not limited
to any claim of wrongful discharge or other unlawful labor practice),
requisition or taking of property by any government or agent thereof, windstorm,
embargo, riot, act of God or public enemy, flood, accident, revocation of
license or right to do business, total or partial termination, suspension,
default or modification of contracts, governmental restriction or regulation,
other calamity, or other similar or dissimilar event (whether or not covered by
insurance) that would result in a Material Adverse Effect on Telegen.
(ii) There have been no changes in the condition (financial or otherwise),
business, net worth, assets, properties, operations, obligations or liabilities
(fixed or contingent) of Telegen which, individually or in the aggregate, have
resulted or may be reasonably expected (whether before or after the Effective
Time) to result in a Material Adverse Effect on Telegen.
(iii) Telegen has not issued, or authorized for issuance, any equity
security, bond, note or other security of Telegen. Telegen has not granted or
entered into any commitment or obligation to issue or sell any such equity
security, bond, note or other security of Telegen, whether pursuant to offers,
stock option agreements, stock bonus agreements, stock purchase plans, incentive
compensation plans, warrants, calls, conversion rights or otherwise.
(iv) Telegen has not incurred any additional debt for borrowed money, nor
incurred any obligation or liability (fixed, contingent or otherwise) except in
the ordinary and usual course of the business of Telegen.
(v) Telegen has not paid any obligation or liability (fixed, contingent
or otherwise), or discharged or satisfied any lien or encumbrance, or settled
any liability, claim, dispute, proceeding, suit, or appeal, pending or
threatened against it or any of its assets or properties, except for current
liabilities included in Telegen Balance Sheet and current liabilities incurred
since the date of Telegen Balance Sheet in the ordinary and usual course of the
business of Telegen.
(vi) Telegen has not declared, set aside for payment, or paid any dividend,
payment, or other distribution on or with respect to any share of capital stock
of Telegen.
(vii) Telegen has not purchased, redeemed or otherwise acquired or
committed itself to acquire, directly or indirectly, any share or shares of
capital stock of Telegen.
(viii) Telegen has not mortgaged, pledged, otherwise encumbered or
subjected to lien any of its assets or properties, tangible or intangible, nor
has it committed itself to do any of the foregoing, except for liens for current
taxes which are not yet due and payable and purchase money liens arising out of
the purchase or sale of products or services made in the ordinary and usual
course of business.
(ix) Telegen has not disposed of, or agreed to dispose of, any asset or
property, tangible or intangible, except in the ordinary and usual course of
business, and in each case for a consideration at least equal to the fair value
of such asset or property, nor has Telegen leased or licensed to others
(including officers and directors of Telegen), or agreed so to lease or license,
any asset or property.
(x) Telegen has not purchased or agreed to purchase or otherwise acquire
any debt or equity securities of any corporation, partnership, joint venture,
firm or other entity. Telegen has not made any expenditure or commitment for the
purchase, acquisition, construction or improvement of a capital asset.
(xi) Telegen has not entered into any transaction or contract, or made any
commitment to do the same. Telegen has not waived any right of substantial value
or cancelled any debts or claims or voluntarily suffered any extraordinary
losses, which individually or in the aggregate would result in a Material
Adverse Effect on Telegen.
(xii) Telegen has not effected or agreed to effect any amendment or
supplement to any employee profit sharing, stock option, stock purchase,
pension, bonus, incentive, retirement, medical reimbursement, life insurance,
deferred compensation or any other employee benefit plan or arrangement.
(xii) Telegen has not effected or agreed to effect any change, including by
way of hiring or involuntary termination, in its directors, executive officers,
or key employees.
(xiv) Telegen has not effected or committed itself to effect any amendment
or modification of the Telegen Articles or the Telegen Bylaws.
(xv) To the knowledge of Telegen, no statute has been enacted nor has any
rule or regulation been adopted (whether before or after the date of Telegen
Balance Sheet) which may reasonably be expected to result in a Material Adverse
Effect on Telegen.
(xvi) Telegen has not changed in any way its accounting methods or
practices (including any change in depreciation or amortization policies or
rates, or any changes in policies in making or reversing accruals).
(xvii) Telegen has not made any loan to any person or entity, and Telegen
has not guaranteed the payment of any loan or debt of any person or entity.
(xviii) Telegen has not negotiated or agreed to do any of the things
described in the preceding clauses (i) through (xvii) (other than negotiations
with Telegen and its representatives regarding the transactions contemplated by
this Agreement).
(g) Litigation. Except as set forth in Schedule 3.1(g), there is no claim,
dispute, action, proceeding, suit or appeal, or investigation, at law or in
equity, pending against Telegen, or involving any of its assets of properties,
before any court, agency, authority, arbitration panel or other tribunal, and,
to the knowledge of Telegen, none have been threatened against Telegen. To the
knowledge of Telegen, there are no facts which, if known to shareholders,
customers, governmental authorities, or other persons, would result in any such
claim, dispute, action, proceeding, suit or appeal or investigation which would
have a Material Adverse Effect on Telegen. Telegen is not subject to any order,
writ, injunction or decree of any court, agency, authority, arbitration panel or
other tribunal, and Telegen is not in default with respect to any notice, order,
writ, injunction or decree.
(h) Compliance With the Law and other Instruments. The business operation
of Telegen has been and is being conducted in all material respects in
accordance with all applicable laws, rules, and regulations of all authorities.
Telegen has not received any notice of violation with respect to any applicable
laws, regulations, orders, or other requirements of a Governmental Entity or
other authority, including, without limiting the generality of the foregoing,
the Employee Retirement Income Security Act of 1974, as amended. Telegen is not
in violation of, or in default under, any term or provision of the Telegen
Articles or the Telegen Bylaws. Telegen has in all material respects performed,
or is now performing the obligations of, and Telegen is not in default (and
would not by the lapse of time or giving of notice be in default) in respect of
any note, debt instrument, lien, mortgage, lease, order, judgment, or decree, or
any other contract, agreement, or commitment binding upon it or its assets or
properties or material to the conduct of its business. There is no agreement
(assuming the parties thereto other than Telegen performed their respective
obligations thereunder as required), judgment, injunction, order or decree
binding upon Telegen which has or could reasonably be expected to have the
effect of materially prohibiting or materially impairing any business practice
of Telegen, any acquisition of property by Telegen, or the conduct of business
by Telegen as currently conducted or as proposed to be conducted following the
Merger. Schedule 3.1(h) contains a full and complete list of all necessary
consents, waivers, and approvals of third parties that are required to be
obtained by Telegen in connection with the execution and delivery by Telegen of
this Agreement and the performance of the Telegen's obligations hereunder.
(i) Title to Properties and Assets. Telegen has good and marketable title
to all its properties and assets, including without limitation those reflected
in the Telegen Financial Statements and those used or located on property
controlled by Telegen in its business on the date of the Telegen Balance Sheet
and acquired thereafter (except assets sold in the ordinary course of business),
subject to no mortgage, pledge, lien, charge, security interest, encumbrance, or
restriction except those which (i) are disclosed in the Telegen Balance Sheet as
securing specified liabilities; or (ii) do not materially adversely affect the
use thereof. The buildings and equipment of Telegen are in good condition and
repair, reasonable wear and tear excepted. Telegen has not been, to the
knowledge of any officer of Telegen, threatened with any action or proceeding
under any building or zoning ordinance, regulation, or law. Except as otherwise
provided in Schedule 3.1(i) of this Agreement, Telegen owns, free and clear of
any liens, claims, encumbrances, royalty interests, or other restrictions or
limitations of any nature whatsoever, any and all patents, trade secrets,
copyrights, procedures, techniques, business plans, methods of management, or
other information utilized in connection with Telegen's business and set forth
in Schedule 3.1(i). To the best of Telegen's knowledge, the products Telegen
manufactures and/or markets, or plans to market, and its plan of operation do
not infringe on the patents, copyrights, trade secrets, or other proprietary
rights of any third person. Telegen owns or is licensed to use all intellectual
property necessary to develop and sell products based on the intellectual
property embodied in the telecommunications products currently marketed and sold
by Telegen and in the flat panel display and voice recognition products under
development by Telegen. All current Telegen research and business development
activities related to Telegen's business are listed on Schedule 3.1(i) and,
except as noted on Schedule 3.1(i), have been conducted and are currently owned
by Telegen.
(j) Telegen Leases. There are no related party leases, and all leases have
been negotiated at "arm's length."
(k) Schedule of Leases and Insurance. Schedule 3.1(k) contains a true and
complete description of each indenture, lease, sublease, or any instrument under
which Telegen claims or holds a leasehold interest for either equipment,
automobiles, or real property. Telegen has good and valid leasehold interests in
such properties and all such instruments are in effect and enforceable according
to their respective terms; and a complete schedule of all fire and other
casualty and liability policies of Telegen in effect at the time of delivery of
said schedule.
(l) Creditor's Arrangements. Telegen has not made any assignment for the
benefit of creditors nor has any involuntary or voluntary petition in bankruptcy
been filed by or against Telegen.
(m) Contracts and Other Obligations. Except with respect to this
transaction, Telegen is not a party to, or otherwise bound by, any written or
oral:
(i) Contract or agreement not made in the ordinary course of business,
except as disclosed on Schedule 3.1(m)(i);
(ii) Employment or consultant contract which is not terminable at will
without cost or other liability to Telegen or any successor, except as disclosed
on Schedule 3.1(m)(ii);
(iii) Contract with any labor union, except as disclosed on Schedule
3.1(m)(iii);
(iv) Bonus, pension, profit-sharing, retirement, share purchase, stock
option, hospitalization, group insurance, or similar plan providing employee
benefits except as disclosed on Schedule 3.1(m)(iv);
(v) Advertising contract or contract for public relations services, except
as disclosed on Schedule 3.1(m)(v);
(vi) Purchase, supply, or service contracts in excess of $25,000 each, or
in the aggregate of $150,000 for all such contracts whether below or above
$25,000, except as disclosed on Schedule 3.1(m)(vi);
(vii) Deed of trust, mortgage, conditional sales contract, security
agreement, pledge agreement, trust receipt, or any other agreement or
arrangement whereby any of the assets or properties of Telegen are subjected to
a lien, encumbrance, charge, or other restriction, except as disclosed on
Schedule 3.1(m)(vii);
(viii) Contract or other commitment continuing for a period of more than 30
days and which is not terminable without cost or other liability to Telegen or
its successor, except as disclosed on Schedule 3.1(m)(viii);
(ix) Contract which (a) contains a redetermination of price or similar type
of provision; or (b) provides for a fixed price for goods or services sold,
except as disclosed on Schedule 3.1(m)(i); or
(x) Contract or arrangement containing any covenant limiting the right of
Telegen to compete in any business or with any person.
Telegen has in all material respects performed all obligations required to
be performed by it to date and is not in material default under any of the
contracts, agreements, leases, documents, or other arrangements to which it is a
party or by which it is otherwise bound. To the best of Telegen's knowledge, all
parties with whom Telegen has contractual arrangements are in material
compliance therewith and are not in default thereunder.
(n) Changes in Compensation. Since the date of the Telegen Balance Sheet,
there has not been any general pay increase to employees or any change in the
rate of compensation, commission, bonus, or other remuneration payable to any
officer, employee, director, agent, or shareholder of Telegen other than in the
ordinary course of business.
(o) Inventories. Since the date of the Telegen Balance Sheet, Telegen has
continued to replenish its inventories in a normal and customary manner
consistent with prior practice and prudent practice prevailing in the businesses
of Telegen, and will continue to do so until the Closing Date.
(p) Records. The books of account, minute books, stock certificate books,
and stock transfer ledgers of Telegen are complete and correct, and there have
been no transactions involving the business of Telegen which properly should
have been set forth in said respective books, other than those set forth
therein.
(q) Brokers or Finders. All negotiations on the part of Telegen relative to
this Agreement and the transactions contemplated hereby have been carried on by
Telegen without the intervention of any person or as the result of any act of
Telegen in such manner as to give rise to any valid claim against Telegen or the
Acquiror for a brokerage commission, finder's fee, or other like payment.
(r) Taxes. Except as disclosed in Schedule 3.1(r), Telegen has accurately
prepared and timely filed all federal, state, county and local income,
franchise, excise, real and personal property and other tax returns and reports
(including, but not limited to, those relating to social security, withholding,
unemployment insurance, and occupation (sales) and use taxes) required to have
been filed by Telegen up to the date hereof. All of the foregoing returns are
true and correct in all material respects and Telegen has paid all taxes,
interest and penalties shown on such returns or reports as being due. Telegen
has withheld with respect to its employees all federal and state income taxes,
FICA, FUTA, and other taxes that Telegen is required to withhold. The accruals
for Telegen's taxes on the books and records of Telegen are sufficient to
discharge the taxes for all periods (or the portion of any period) ending on or
prior to the Closing Date. Telegen has not been delinquent in the payment of any
tax nor is there any tax deficiency outstanding, proposed, or assessed against
Telegen, nor has Telegen executed any waiver of any statute of limitations on or
extending the period for the assessment or collection of any tax. No audit or
other examination of any return of Telegen filed with any taxing authority is
presently in progress. Telegen does not have any liabilities for unpaid,
federal, state, local, or foreign taxes, whether asserted or unasserted, known
or unknown, contingent or otherwise, and Telegen has no knowledge of any basis
for the assertion of any such liability attributable to Telegen, its assets, or
operations. Telegen is not (and has never been) required to join with any other
entity in the filing of a consolidated tax return for federal tax purposes or a
consolidated or combined return or report for state tax purposes. Telegen is not
a party to or bound by any tax indemnity, tax sharing, or tax allocation
agreement. Telegen has provided to Telegen or its legal counsel copies of all
federal and state income and all state sales and use tax returns for all periods
since December 31, 1990. There are (and as of immediately following the Closing
there will be) no liens on the assets of Telegen relating to or attributable to
taxes). Telegen has no knowledge of any basis for the assertion of any claim
which, if adversely determined, would result in liens on the assets of Telegen.
(s) Environmental Matters. Telegen's operations of its business and assets
has been in material compliance with and Telegen has complied in all material
respects with and is not in violation of applicable federal, state, and local
laws, ordinances, regulations and orders relating to environmental matters,
including but not limited to matters related to air pollution, water pollution,
and the handling of hazardous substances (as defined in the Comprehensive
Environmental Response, compensation, and liability Act of 1990 ("CERCLA")).
There are no actions, proceedings or investigations pending or, to the actual
knowledge of Telegen, threatened before any federal or state environmental
regulatory body, or before any federal or state court, alleging noncompliance by
Telegen with CERCLA or any other Environmental Law (as hereinafter defined). To
the actual knowledge of Telegen: (i) there is no reasonable basis for the
institution of any action, proceeding or investigation against Telegen under any
Environmental Law; (ii) Telegen is not responsible under any environmental law
for any release by any person at or in the vicinity of real property of any
hazardous substance (as defined by CERCLA), caused by the spilling, leaking,
pumping, pouring, emitting, emptying, discharging, injecting, escaping,
leaching, dumping or disposing of any such hazardous substance into the
environment; (iii) Telegen is not responsible for any costs of any remedial
action required by virtue of any release of any toxic or hazardous substance,
pollutant or contaminant into the environment including, without limitation,
costs arising from security fencing, alternative water supplies, temporary
evacuation and housing and other emergency assistance undertaken by any
environmental regulatory body; (iv) Telegen is in compliance with all applicable
Environmental Laws; and (v) no real property used, owned, managed or controlled
by Telegen contains any toxic or hazardous substance including, without
limitation, any asbestos, PCBs or petroleum products or byproducts in any form,
the presence, location or condition of which (a) violates any Environmental Law,
or (b) otherwise would pose any significant health or safety risk unless
remedial measures were taken. For purposes of this Agreement, "Environmental
Law" shall mean any federal, state, local or municipal statute, ordinance or
regulation, or order, ruling or other decision of any court, administrative
agency, or other governmental authority pertaining to the release of hazardous
substances (as defined in CERCLA) into the environment.
(t) Indemnification Liabilities. There are no existing liabilities or facts
know to Telegen which would require Telegen to indemnify its officers or
directors for acts or omissions by such persons acting in behalf of Telegen.
(u) Accounts Receivable. All accounts receivable of Telegen shown on the
Telegen Balance Sheet or thereafter acquired arose and are collectible in the
ordinary and usual course of its business, except that the value of any account
receivable, the collection of which is doubtful or which is subject to a defense
or set-off, has been written down to an amount not in excess of net realizable
value or adequate reserves or allowances therefor have been provided. The values
at which accounts receivable are carried reflect the accounts receivable
valuation policy of Telegen, which is consistent with its past practice and in
accordance with generally accepted accounting principles applied on a consistent
basis. To the knowledge of Telegen, none of the receivables of Telegen is
subject to any claim of offset, recoupment, set off, or counterclaim, and there
are no facts or circumstances (whether asserted or unasserted) that would give
rise to any claim. No receivables are contingent upon the performance by Telegen
of any obligation or contract. No person or entity has any lien, charge, pledge,
security interest, or other encumbrance on any such receivables, and no
agreement for deduction or discount has been made with respect to any of such
receivables.
(v) Bank Accounts. Schedule 3.2(v) constitutes a full and complete list of
all the bank accounts of Telegen, together with the names of the persons
authorized to draw thereon. All cash in such accounts is held in demand deposits
and is not subject to any restriction or limitation as to withdrawal.
(w) Certain Advances. There are no receivables of Telegen owing by
directors or officers of Telegen, or owing by any Affiliate of any director or
officer of Telegen. For purposes of this Agreement, "Affiliate" shall mean the
officers and directors of Telegen and any stockholder of Telegen who owns five
percent (5%) or more the outstanding capital stock of Telegen.
(x) Insurance. Schedule 3.2(x) lists all insurance policies and fidelity
bonds covering the assets, business, equipment, properties, operations,
employees, officers, and directors of Telegen as well as all claims made under
any insurance policy by Telegen since December 31, 1990. There is no claim by
Telegen pending under any of such policies or bonds as to which coverage has
been questioned, denied, or disputed by the underwriters of such policies or
bonds. All premiums payable under all such policies and bonds have been paid,
and Telegen is otherwise in compliance in all material respects with the terms
of such policies and bonds (or other policies and bonds providing substantially
similar insurance coverage). Such policies of insurance and bonds are of the
type and in amounts customarily carried by persons conducting businesses similar
to those of Telegen. Telegen does not know of any threatened termination of or
material premium increase with respect to any of such policies. Telegen has
never been denied insurance coverage nor has any insurance policy of Telegen
ever been cancelled for any reason.
(y) FIRPTA Status. Telegen is not, and has not been at any time during the
five year period preceding the date hereof, a "United States real property
holding corporation" as defined in Section 897 of the Internal Revenue Code of
1954, as amended, and the regulations promulgated thereunder.
(z) Representations Complete. None of the representations or warranties
made by Telegen, nor any statement made in any schedule, exhibit, or certificate
furnished by Telegen pursuant to this Agreement, contains or will contain any
untrue statement of a material fact or omits or will omit to state any material
fact necessary in order to make the statements contained herein or therein, in
light of the circumstances under which they were made, not misleading.
Section 3.2 Representations and Warranties by the Acquiror and Merger Sub.
As a material inducement to Telegen to execute and perform its obligations under
this Agreement, the Acquiror and Merger Sub represent and warrant to Telegen,
subject to the exceptions specifically disclosed in the schedules, referencing
the appropriate section number, delivered by Acquiror to Telegen prior to
signing this Agreement (the "Acquiror Schedules") as follows:
(a) Organization and Standing of Acquiror. The Acquiror is a corporation
duly organized and validly existing and in good standing under the laws of the
State of Colorado. It has all requisite corporate power and authority to carry
on its business as now being conducted and as proposed to be conducted, to enter
into this Agreement and to carry out and perform the terms and provisions of
this Agreement. The Acquiror is duly qualified to do business and is in good
standing as a foreign corporation in each jurisdiction in which the failure to
be so qualified would have a Material Adverse Effect on the Acquiror. The
Acquiror does not now and has not within the two years prior to the date of this
Agreement conducted business in any jurisdiction other than the State of
Colorado such as to require it to seek authority from such state to do business
as a foreign corporation. The Acquiror has delivered a true and correct copy of
its Articles of Incorporation (the "Acquiror Articles") and its Bylaws (the
"Acquiror Bylaws"), each as amended to date, to counsel for Telegen. The
Acquiror has one wholly owned subsidiary, Merger Sub, and, further, has no
direct or indirect interest, either by way of stock ownership or otherwise, in
any other firm, corporation, association, or business other than as disclosed in
Schedule 3.2(a).
(b) (i) Capitalization and Indebtedness for Borrowed Moneys. The Acquiror
is duly and lawfully authorized by the Acquiror Articles to issue 100,000,000
shares of Acquiror Common Stock, of which 1,178,759 shares are issued and
outstanding as of the date hereof and 25,000,000 shares of Acquiror Preferred,
of which no shares are issued and outstanding. Additionally, there are
outstanding warrants to acquire 60,000 shares of Acquiror Common (the
"Warrants"). The Acquiror has no treasury stock and no other authorized series
or class of stock. All the outstanding shares of Acquiror Common have been duly
authorized and validly issued and are fully paid and nonassessable and free of
preemptive rights. All of the shares of Acquiror Common and Acquiror Preferred
to be issued by Acquiror in connection with the Merger shall be duly authorized,
validly issued, fully paid, nonassessable, and not subject to preemptive rights
created by statute, the Acquiror Articles, or any agreement to which the
Acquiror is a party or bound. The Acquiror Common and Acquiror Preferred will be
issued in compliance with all applicable state and federal securities laws and,
upon compliance with the exemption set forth in Section 3(a)(10) of the
Securities Act of 1933, as amended (the "1933 Act"), will be freely tradeable
subject to the resale limitations of Rules 144 and 145 under the 1933 Act, and
the provisions of Sections 6.1 and 6.2 of this Agreement.
(ii) The Acquiror is not presently liable on account of any indebtedness
for borrowed moneys, except as reflected in the financial statements described
in subparagraph (e) below. The borrowed indebtedness of the Acquiror as of the
Closing Date is set forth in Schedule 3.1(b)(ii).
(iii) With the exception of an ongoing private placement of 200,000 shares
of Common Stock and the Warrants, there are no outstanding subscriptions,
options, warrants, calls, contracts, demands, commitments, convertible
securities, or other agreements or arrangements of any character or nature
whatever under which the Acquiror is or may be obligated to issue or purchase
shares of its capital stock other than as disclosed in Schedule 3.2(b)(iii).
(c) Ownership of Acquiror Capital Stock. Schedule 3.2(c) sets forth a
complete and accurate list of all issued and outstanding shares and warrants,
options, or similar rights to acquire such shares of the Acquiror's capital
stock and the names of the holders thereof.
(d) Organization and Capitalization of Merger Sub. Merger Sub is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of California, and at the Effective Time, will have full power
and authority to carry out the transactions contemplated in this Agreement to be
carried out by it. The authorized capital stock of Merger Sub consists of 1,000
shares of Common Stock, all of which, as of the date of this Agreement, are
issued and outstanding and held by Acquiror. As of the date hereof, Merger Sub
has no assets and Merger Sub does not and will not have any liabilities, except
liabilities for organizational expenses. Acquiror has delivered true and correct
copies of the Articles of Incorporation of Merger Sub (the "Merger Sub
Articles") and the Bylaws of Merger Sub (the "Merger Sub Bylaws"), each as
amended to date, to counsel for Telegen.
(e) Acquiror's Authority. Acquiror has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery, and performance of this Agreement
shall have been duly authorized by all requisite corporate action. This
Agreement has been duly executed and delivered by Acquiror and constitutes a
valid and binding obligation of the Acquiror enforceable in accordance with its
terms (except as limited by bankruptcy, insolvency, or other laws affecting the
enforcement of creditors' rights). The execution and delivery of this Agreement
by the Acquiror does not and the consummation of the transactions contemplated
hereby will not conflict with or result in any violation of or default under
(with or without notice or lapse of time, or both) or give rise to a right of
termination, cancellation, or acceleration of any obligation or to loss of a
material benefit under (i) any provision of the Acquiror Articles or the
Acquiror's Bylaws or (ii) any mortgage, indenture, lease, contract or other
agreement or instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to
Acquiror or its properties or assets. No consent, approval, order, or
authorization of, or registration, declaration or filing with, any Governmental
Entity is required by or with respect to Acquiror in connection with the
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for (i) the filing of the Merger Documents with the
Secretary of State of California and the filing of appropriate documents with
the relevant authorities of other states in which the Acquiror is qualified to
do business and (ii) such consents, approvals, orders, authorizations,
registrations, declarations, and filings as may be required under applicable
state securities laws, including the filing of the permit application
contemplated by Section 4.3.
(f) Financial Statements. The Acquiror has timely filed with the Securities
and Exchange Commission (the "Commission") all reports and other document
required to be filed by the Acquiror with the Commission pursuant to the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and the rules and
regulations promulgated thereunder. The Acquiror has delivered to Telegen and
Telegen's counsel true and complete copies of all reports and other filings made
by the Acquiror with the Commission pursuant to the 1933 Act, or the 1934 Act
since December 31, 1992 and through the date hereof (collectively, the "SEC
Documents"). As of their respective filing dates, the SEC Documents complied in
all material respects with the requirements of the 1933 Act or the 1934 Act, as
applicable, and none of the SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading. The consolidated
financial statements of Acquiror contained in the SEC Documents (the "Acquiror
Financial Statements") are complete and correct, comply as to form in all
respects with applicable accounting requirements and with the published rules
and regulations of the Commission with respect thereto, have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods involved, and fairly present the consolidated
financial position of the Acquiror and the results of its operations and cash
flows as of the respective dates and for the periods indicated thereon (subject,
in the case of the unaudited statements, to normal recurring accounting
adjustments). There has been no change in the Acquiror's accounting policies or
estimates except as described in the notes to the Acquiror Financial Statements.
Acquiror has no liabilities or obligations, fixed, contingent, or otherwise not
reflected on the most recent balance sheet included in the Acquiror Financial
Statements (the "Acquiror Balance Sheet"), except for (i) liabilities incurred
in the ordinary course of the Acquiror's business since the date of the Acquiror
Balance Sheet which individually do not exceed $5,000 and in the aggregate do
not exceed $25,000 and are usual and normal for the Acquiror and (ii)
liabilities and obligations as may have arisen in the ordinary course of
business prior to the date of the Acquiror Balance Sheet, which under generally
accepted accounting principles were not required to be reflected on the Acquiror
Balance Sheet, and which do not exceed $5,000 individually or $25,000 in the
aggregate. All such financial statements present fairly the financial condition
of the Acquiror at such date, and the results of its operations for the period
therein specified, and were prepared in accordance with generally accepted
accounting principles applied upon a basis consistent with prior accounting
periods.
(g) Present Status. Since the date of the Acquiror Balance Sheet (or such
other date specifically set forth herein), except as otherwise contemplated by
this Agreement and except as described in Schedule 3.2(g), the Acquiror has
conducted its business in the usual and ordinary course and without limiting the
generality of the foregoing:
(i) The Acquiror has not sustained any damage, destruction, or loss by
reason of fire, explosion, earthquake, casualty, labor trouble (including but
not limited to any claim of wrongful discharge or other unlawful labor
practice), requisition or taking of property by any government or agent thereof,
windstorm, embargo, riot, act of God or public enemy, flood, accident,
revocation of license or right to do business, total or partial termination,
suspension, default or modification of contracts, governmental restriction or
regulation, other calamity, or other similar or dissimilar event (whether or not
covered by insurance) that would result in a Material Adverse Effect on the
Acquiror.
(ii) There have been no changes in the condition (financial or otherwise),
business, net worth, assets, properties, operations, obligations or liabilities
(fixed or contingent) of the Acquiror which, individually or in the aggregate,
have resulted or may be reasonably expected (whether before or after the
Effective Time) to result in a Material Adverse Effect on the Acquiror.
(iii) The Acquiror has not issued, or authorized for issuance, any equity
security, bond, note or other security of the Acquiror. The Acquiror has not
granted or entered into any commitment or obligation to issue or sell any such
equity security, bond, note or other security of the Acquiror, whether pursuant
to offers, stock option agreements, stock bonus agreements, stock purchase
plans, incentive compensation plans, warrants, calls, conversion rights or
otherwise.
(iv) The Acquiror has not incurred any additional debt for borrowed money,
nor incurred any obligation or liability (fixed, contingent or otherwise) except
in the ordinary and usual course of the business of the Acquiror.
(v) The Acquiror has not paid any obligation or liability (fixed,
contingent or otherwise), or discharged or satisfied any lien or encumbrance, or
settled any liability, claim, dispute, proceeding, suit, or appeal, pending or
threatened against it or any of its assets or properties, except for current
liabilities included in the Acquiror Balance Sheet and current liabilities
incurred since the date of the Acquiror Balance Sheet in the ordinary and usual
course of the business of the Acquiror.
(vi) The Acquiror has not declared, set aside for payment, or paid any
dividend, payment, or other distribution on or with respect to any share of
capital stock of the Acquiror.
(vii) The Acquiror has not purchased, redeemed or otherwise acquired or
committed itself to acquire, directly or indirectly, any share or shares of
capital stock of the Acquiror.
(viii) The Acquiror has not mortgaged, pledged, otherwise encumbered or
subjected to lien any of its assets or properties, tangible or intangible, nor
has it committed itself to do any of the foregoing, except for liens for current
taxes which are not yet due and payable and purchase money liens arising out of
the purchase or sale of products or services made in the ordinary and usual
course of business.
(ix) The Acquiror has not disposed of, or agreed to dispose of, any asset
or property, tangible or intangible, except in the ordinary and usual course of
business, and in each case for a consideration at least equal to the fair value
of such asset or property, nor has the Acquiror leased or licensed to others
(including officers and directors of the Acquiror), or agreed so to lease or
license, any asset or property.
(x) The Acquiror has not purchased or agreed to purchase or otherwise
acquire any debt or equity securities of any corporation, partnership, joint
venture, firm or other entity. The Acquiror has not made any expenditure or
commitment for the purchase, acquisition, construction or improvement of a
capital asset.
(xi) The Acquiror has not entered into any transaction or contract, or made
any commitment to do the same. The Acquiror has not waived any right of
substantial value or cancelled any debts or claims or voluntarily suffered any
extraordinary losses, which individually or in the aggregate would result in a
Material Adverse Effect on the Acquiror.
(xii) The Acquiror has not effected or agreed to effect any amendment or
supplement to any employee profit sharing, stock option, stock purchase,
pension, bonus, incentive, retirement, medical reimbursement, life insurance,
deferred compensation or any other employee benefit plan or arrangement.
(xiii) The Acquiror has not effected or agreed to effect any change,
including by way of hiring or involuntary termination, in its directors,
executive officers, or employees.
(xiv) The Acquiror has not effected or committed itself to effect any
amendment or modification of the Acquiror Articles or the Acquiror Bylaws.
(xv) To the knowledge of the Acquiror, no statute has been enacted nor has
any rule or regulation been adopted (whether before or after the date of the
Acquiror Balance Sheet) which may reasonably be expected to result in a Material
Adverse Effect on the Acquiror.
(xvi) The Acquiror has not changed in any way its accounting methods or
practices (including any change in depreciation or amortization policies or
rates, or any changes in policies in making or reversing accruals).
(xvii) The Acquiror has not made any loan to any person or entity, and the
Acquiror has not guaranteed the payment of any loan or debt of any person or
entity.
(xviii) The Acquiror has not negotiated or agreed to do any of the things
described in the preceding clauses (i) through (xvii) (other than negotiations
with Telegen and its representatives regarding the transactions contemplated by
this Agreement).
(h) Litigation. Except as disclosed in the Acquiror Financial Statements or
Schedule 3.2(h), there is no claim, dispute, action, proceeding, suit or appeal,
or investigation, at law or in equity, pending against the Acquiror, or
involving any of its assets or properties, before any court, agency, authority,
arbitration panel or other tribunal, and, the knowledge of the Acquiror, none
have been threatened against the Acquiror. To the knowledge of the Acquiror,
there are no facts which, if known to stockholders, customers, governmental
authorities or other persons, would result in any such claim, dispute, action,
proceeding, suit or appeal or investigation which would have a Material Adverse
Effect on the Acquiror. The Acquiror is not subject to any order, writ,
injunction or decree of any court, agency, authority, arbitration panel or other
tribunal, and the Acquiror is not in default with respect to any notice, order,
writ, injunction or decree.
(i) Compliance With the Law and Other Instruments. The business operation
of the Acquiror has been and is being conducted in all material respects in
accordance with all applicable laws, rules, and regulations of all authorities.
The Acquiror has not received any notice of violation with respect to any
applicable laws, regulations, orders, or other requirements of a Governmental
Entity or other authority, including, without limiting the generality of the
foregoing, the Employee Retirement Income Security Act of 1974, as amended. The
Acquiror is not in violation of, or in default under, any term or provision of
the Acquiror Articles, or the Acquiror Bylaws, as amended. The Acquiror has in
all material respects performed, or is now performing the obligations of, and
the Acquiror is not in default (and would not by the lapse of time or giving of
notice be in default) in respect of any note, debt instrument, lien, mortgage,
lease, order, judgment, or decree, or any other contract, agreement, or
commitment binding upon it or its assets or properties or material to the
conduct of its business. There is no agreement (assuming the parties thereto
other than the Acquiror performed their respective obligations thereunder as
required), judgment, injunction, order or decree binding upon the Acquiror which
has or could reasonably be expected to have the effect of materially prohibiting
or materially impairing any business practice of the Acquiror, any acquisition
of property by the Acquiror, or the conduct of business by the Acquiror as
currently conducted or as proposed to be conducted following the Merger.
Schedule 3.2(i) contains a full and complete list of all necessary consents,
waivers, and approvals of third parties that are required to be obtained by the
Acquiror in connection with the execution and delivery of this Agreement by the
Acquiror and the performance of the Acquiror's obligations hereunder.
(j) Title to Properties and Assets. The Acquiror has good and marketable
title to all its properties and assets, including without limitation those
reflected in the Acquiror's Financial Statements and those used or located on
property controlled by the Acquiror in its business on the date of the Acquiror
Balance Sheet and acquired thereafter (except assets sold in the ordinary course
of business), subject to no mortgage, pledge, lien, charge, security interest,
encumbrance, or restriction except those which (i) are disclosed in the Acquiror
Financial Statements as securing specified liabilities; or (ii) do not
materially adversely affect the use thereof. The buildings and equipment of the
Acquiror are in good condition and repair, reasonable wear and tear excepted.
The Acquiror has not been, to the knowledge of any officer of Acquiror,
threatened with any action or proceeding under any building or zoning ordinance,
regulation, or law. The Acquiror does not currently, nor has it in the past,
owned any real property.
(k) Acquiror Leases. The Acquiror is not liable on any lease for property,
equipment, or real estate.
(l) Creditor's Arrangements. The Acquiror has not made any assignment for
the benefit of creditors, nor has any involuntary or voluntary petition in
bankruptcy been filed by or against the Acquiror.
(m) Contracts and Other Obligations. Schedule 3.2(m) constitutes a full and
complete list (subject to the dollar amounts set forth in clause (vii) below) of
each partially or totally executory contract or agreement to which the Acquiror
is a party or by which it is bound. Other than as set forth on Schedule 3.2(m),
the Acquiror is not a party to or otherwise bound by, any written or oral:
(i) Contract or agreement not made in the ordinary course of business;
(ii) Employment or consultant contract which is not terminable at will
without cost or other liability to the Acquiror or any successor, except as
disclosed on Schedule 3.2(m)(ii) hereto;
(iii) Contract with any labor union;
(iv) Bonus, pension, profit-sharing, retirement, share purchase, stock
option, hospitalization, group insurance, or similar plan providing employee
benefits, except as disclosed in its filings with the Securities and Exchange
Commission;
(v) Lease with respect to any property, real or personal, whether as lessor
or lessee;
(vi) Advertising contract or contract for public relations services;
(vii) Purchase, supply, or service contracts in excess of $1,000 each, or
in the aggregate of $10,000 for all such contracts whether below or above
$1,000;
(viii) Deed of trust, mortgage, conditional sales contract, security
agreement, pledge agreement, trust receipt, or any other agreement or
arrangement whereby any of the assets or properties of the Acquiror are
subjected to a lien, encumbrance, charge, or other restriction, except as
disclosed on Schedule 3.2(m)(viii) thereto;
(ix) Contract or other commitment continuing for a period of more than 30
days and which is not terminable without cost or other liability to the Acquiror
or its successor; or
(x) Contract which (a) contains a redetermination of price or similar type
of provision or (b) provides for a fixed price for goods or services sold.
(xi) Contract or arrangement which will result in an excess parachute
payment under Code Section 280G of the Internal Revenue Code.
(xii) Contract or arrangement containing any covenant limiting the right of
the Acquiror to compete in any business or with any person.
The Acquiror has performed all obligations required to be performed by it
to date and is not in default under any of the contracts, agreements, leases,
documents, or other arrangements to which it is a party or bound. To the best of
Acquiror's knowledge, all parties with whom the Acquiror has contractual
arrangements are in compliance therewith and are not in default thereunder.
(n) Changes in Compensation. Schedule 3.2(n) constitutes a full and
complete list of all directors, officers, employees of or consultants to the
Acquiror as of the date of the Acquiror Balance Sheet and specifies each of
their names and job designations, the total amount paid or payable to such
director, officer, employee, or consultant in their prior fiscal year and from
the beginning of the current fiscal year through the date of the Acquiror
Balance Sheet and the basis of such compensation, whether fixed or commission or
a combination thereof. Since September 30, 1995, there has not been any general
pay increase to employees or any change in the rate of compensation, commission,
bonus, or other remuneration payable to any officer, employee, director, agent,
or stockholder of the Acquiror.
(o) Inventories. Acquiror has no inventories.
(p) Records. The books of account, minute books, stock certificate books,
and stock transfer ledgers of the Acquiror are complete and correct, and there
have been no transactions involving the business of the Acquiror which properly
should have been set forth in said respective books, other than those set forth
therein.
(q) Brokers or Finders. All negotiations on the part of the Acquiror
relative to this Agreement and the transactions contemplated hereby have been
carried on by Acquiror without the intervention of any person or as the result
of any act of the Acquiror in such manner as to give rise to any valid claim
against Telegen for a brokerage commission, finder's fee, or other like payment.
(r) Taxes. The Acquiror has accurately prepared and timely filed all
federal, state, county and local income, franchise, excise, real and personal
property and other tax returns and reports (including, but not limited to, those
relating to social security, withholding, unemployment insurance, and occupation
(sales) and use taxes) required to have been filed by the Acquiror up to the
date hereof. All of the foregoing returns are true and correct in all material
respects and the Acquiror has paid all taxes, interest and penalties shown on
such returns or reports as being due. The Acquiror has withheld with respect to
its employees all federal and state income taxes, FICA, FUTA, and other taxes
that the Acquiror is required to withhold. The accruals for the Acquiror's taxes
on the books and records of the Acquiror are sufficient to discharge the taxes
for all periods (or the portion of any period) ending on or prior to the Closing
Date. The Acquiror has not been delinquent in the payment of any tax nor is
there any tax deficiency outstanding, proposed, or assessed against the
Acquiror, nor has the Acquiror executed any waiver of any statute of limitations
on or extending the period for the assessment or collection of any tax. No audit
or other examination of any return of the Acquiror filed with any taxing
authority is presently in progress. The Acquiror does not have any liabilities
for unpaid, federal, state, local, or foreign taxes, whether asserted or
unasserted, known or unknown, contingent or otherwise, and the Acquiror has no
knowledge of any basis for the assertion of any such liability attributable to
the Acquiror, its assets, or operations. The Acquiror is not (and has never
been) required to join with any other entity in the filing of a consolidated tax
return for federal tax purposes or a consolidated or combined return or report
for state tax purposes. The Acquiror is not a party to or bound by any tax
indemnity, tax sharing, or tax allocation agreement. The Acquiror has provided
to Telegen or its legal counsel copies of all federal and state income and all
state sales and use tax returns for all periods since December 31, 1990. There
are (and as of immediately following the Closing there will be) no liens on the
assets of the Acquiror relating to or attributable to taxes). The Acquiror has
no knowledge of any basis for the assertion of any claim which, if adversely
determined, would result in liens on the assets of the Acquiror.
(s) Environmental Matters. The Acquiror's operations of its business and
assets has been in material compliance with and the Acquiror has complied in all
material respects with and is not in violation of applicable federal, state, and
local laws, ordinances, regulations, and orders relating to environmental
matters, including but not limited to matters related to air pollution, water
pollution, and the handling of hazardous substances (as defined by CERCLA).
There are no actions, proceedings or investigations pending or, to the actual
knowledge of the Acquiror, threatened before any federal or state environmental
regulatory body, or before any federal or state court, alleging noncompliance by
the Acquiror with CERCLA or any other Environmental Laws. To the actual
knowledge of the Acquiror: (i) there is no reasonable basis for the institution
of any action, proceeding or investigation against the Acquiror under any
Environmental Law; (ii) the Acquiror is not responsible under any Environmental
Law for any release by any person at or in the vicinity of real property of any
hazardous substance (as defined by CERCLA), caused by the spilling, leaking,
pumping, pouring, emitting, emptying, discharging, injecting, escaping,
leaching, dumping or disposing of any such hazardous substance into the
environment; (iii) the Acquiror is not responsible for any costs of any remedial
action required by virtue of any release of any toxic or hazardous substance,
pollutant or contaminant into the environment including, without limitation,
costs arising from security fencing, alternative water supplies, temporary
evacuation and housing and other emergency assistance undertaken by any
environmental regulatory body; (iv) the Acquiror is in compliance with all
applicable Environmental Laws; and (v) no real property used, owned, managed or
controlled by the Acquiror contains any toxic or hazardous substance including,
without limitation, any asbestos, PCBs or petroleum products or byproducts in
any form, the presence, location, or condition of which (a) violates any
Environmental Law or (b) otherwise would pose any significant health or safety
risk unless remedial measures were taken.
(t) Indemnification Liabilities. There are no existing liabilities or facts
known to Acquiror which would require Acquiror to indemnify its officers or
directors for acts or omissions by such persons acting on behalf of Acquiror.
(u) Accounts Receivable. All accounts receivable of the Acquiror shown on
the Acquiror Balance Sheet or thereafter acquired arose and are collectible in
the ordinary and usual course of its business, except that the value of any
account receivable, the collection of which is doubtful or which is subject to a
defense or set-off, has been written down to an amount not in excess of net
realizable value or adequate reserves or allowances therefor have been provided.
The values at which accounts receivable are carried reflect the accounts
receivable valuation policy of the Acquiror, which is consistent with its past
practice and in accordance with generally accepted accounting principles applied
on a consistent basis. To the knowledge of the Acquiror, none of the receivables
of the Acquiror is subject to any claim of offset, recoupment, set off, or
counterclaim, and there are no facts or circumstances (whether asserted or
unasserted) that would give rise to any claim. No receivables are contingent
upon the performance by the Acquiror of any obligation or contract. No person or
entity has any lien, charge, pledge, security interest, or other encumbrance on
any such receivables, and no agreement for deduction or discount has been made
with respect to any of such receivables.
(v) Bank Accounts. Schedule 3.2(v) constitutes a full and complete list of
all the bank accounts of the Acquiror, together with the names of the persons
authorized to draw thereon. All cash in such accounts is held in demand deposits
and is not subject to any restriction or limitation as to withdrawal.
(w) Certain Advances. There are no receivables of the Acquiror owing by
directors, officers, employees, consultants or stockholders of the Acquiror, or
owing by any Affiliate of any director or officer of the Acquiror.
(x) Insurance. Schedule 3.2(x) lists all insurance policies and fidelity
bonds covering the assets, business, equipment, properties, operations,
employees, officers, and directors of the Acquiror as well as all claims made
under any insurance policy by the Acquiror since December 31, 1990. There is no
claim by the Acquiror pending under any of such policies or bonds as to which
coverage has been questioned, denied, or disputed by the underwriters of such
policies or bonds. All premiums payable under all such policies and bonds have
been paid, and the Acquiror is otherwise in compliance in all material respects
with the terms of such policies and bonds (or other policies and bonds providing
substantially similar insurance coverage). Such policies of insurance and bonds
are of the type and in amounts customarily carried by persons conducting
businesses similar to those of the Acquiror. The Acquiror does not know of any
threatened termination of or material premium increase with respect to any of
such policies. The Acquiror has never been denied insurance coverage nor has any
insurance policy of the Acquiror ever been cancelled for any reason.
(y) FIRPTA Status. The Acquiror is not, and has not been at any time during
the five year period preceding the date hereof, a "United States real property
holding corporation" as defined in Section 897 of the Internal Revenue Code of
1954, as amended, and the regulations promulgated thereunder.
(z) Representations Complete. None of the representations or warranties
made by the Acquiror, nor any statement made in any schedule, exhibit, or
certificate furnished by the Acquiror pursuant to this Agreement, contains or
will contain any untrue statement of a material fact or omits or will omit to
state any material fact necessary in order to make the statements contained
herein or therein, in light of the circumstances under which they were made, not
misleading.
ARTICLE 4
ACTIONS AND OBLIGATIONS OF THE
ACQUIROR AND TELEGEN BEFORE AND
AFTER THE CLOSING AND SECURITIES ACT MATTERS
Section 4.1 Actions of Telegen Pending Closing. Telegen covenants with the
Acquiror that from the date hereof to and including the Closing Date:
(a) Correct as of Closing. Each representation and warranty of Telegen set
forth in Section 3.1 of this Agreement shall be true and correct on and as of
the Closing Date.
(b) Operations. Except with the prior written consent of the Acquiror,
which consent will not be unreasonably withheld, Telegen will:
(i) Conduct its affairs and business only in the ordinary course of
business;
(ii) Not create or incur any material liabilities other than current
liabilities incurred in the ordinary course of business, except as set forth in
the Telegen Schedules;
(iii) Not create or incur, or suffer to exist, any mortgage, lien, pledge,
hypothecation, charge, encumbrance, or restriction of any kind which is not
otherwise disclosed in this Agreement or the Telegen Schedules;
(iv) Not make any capital expenditures, or capital additions or betterment,
except as many be involved in ordinary repairs, maintenance, and replacement;
(v) Not enter into, renew, extend, amend, or modify any contract or
commitment, except in the ordinary course of business, pursuant to which it will
be obligated to expend, or entitled to receive, in excess of $100,000 annually;
(vi) Maintain its assets and properties in good condition and repair, and
not sell, lease, license, or otherwise dispose of, any of its material assets or
properties, except sales out of inventory in the ordinary course of business;
(vii) Not declare or pay any dividend on, or make any other distribution
upon, or purchase, retire, or redeem, any shares of Telegen Common or Telegen
Preferred, or set aside any funds for any such purpose;
(viii) Not issue or sell, or obligate itself to issue or sell any
additional shares of Telegen Common or Preferred, whether or not such shares
have been previously authorized or issued, or issue or sell any warrants,
rights, or options to acquire any such shares, or acquire any stock of any
corporation, or any interest in any business enterprise, except as set forth in
the Telegen Schedules;
(ix) Not amend the Telegen Articles or the Telegen Bylaws;
(x) Not pay, or agree to pay, conditionally or otherwise, any bonus, extra
compensation, pension, or severance pay to any director, shareholder, officer,
consultant, agent, or employee under any pension plan or otherwise, or increase
the compensation paid by it (except increases in the ordinary course of business
in accordance with Telegen's employee appraisal and salary adjustment programs
currently in effect or pursuant to written agreements outstanding on the date
hereof) at the date of the Telegen Balance Sheet to any officer, director,
agent, consultant, or employee;
(xi) Not discharge or satisfy any material lien, charge, or encumbrance,
nor pay any obligation or liability, absolute or contingent, except (i) current
liabilities shown on the Telegen Balance Sheet or current liabilities incurred
since such date in the ordinary course of business and (ii) expenses incurred in
connection with the transactions contemplated by this Agreement (including,
without limitation, reasonable attorneys' fees, accounting fees, and costs);
(xii) Except with respect to the transactions contemplated by this
Agreement, not merge or consolidate, or obligate itself to do so, with, or into
any other entity;
(xiii) Use reasonable commercial efforts to preserve its business
organization in tact;
(xiv) Use reasonable commercial efforts to preserve the goodwill of its
suppliers, customers, and those having business relations with it;
(xv) Not enter into any transactions, or take any acts which if effected or
performed prior to the date of this Agreement, would constitute a breach of the
representations, warranties, and agreements contained herein; and
(xvi) Not institute, settle, or agree to settle any action or proceeding
before any court or governmental body;
(xvii) Not effect or agree to effect, including by way of hiring or
involuntary termination, any change in the directors or officers of Telegen;
(xviii) Not take, or agree to take, any of the actions described in (i)
through (xvii) above, or any action that would make any of the representations,
covenants, or warranties of Telegen set forth herein untrue and incorrect.
(c) Access to Records. Telegen will afford the Acquiror, its
representatives, counsel, agents, and employees, at reasonable times, and in a
manner and under circumstances which will not cause unreasonable interference
with the operation of Telegen's business, access to all of the properties of
Telegen, and its books, files, records, insurance policies, and other corporate
books and records, for the purpose of audit, inspection, and examination
thereof, and will do, and cause Telegen to do, everything reasonably necessary
to enable the Acquiror to make a complete examination of the assets and
properties of Telegen, and the condition thereof. No such examination, however,
shall constitute a waiver or relinquishment, on the part of the Acquiror, of its
right to rely upon the covenants, representations, and warranties made by
Telegen and the Stockholders in the provisions of this Agreement.
(d) Consultation. Telegen will endeavor to keep the Acquiror apprised with
respect to the operation and conduct of Telegen's business prior to the Closing
Date.
Section 4.2 Actions of Acquiror Pending Closing. The Acquiror covenants
with Telegen that from the date hereof to and including the Closing Date:
(a) Correct as of Closing. Each representation and warranty of the Acquiror
set forth in Section 3.2 of this Agreement shall be true and correct on and as
of the Closing Date.
(b) Operations. Except with the prior written consent of Telegen, which
consent will not be unreasonably withheld, the Acquiror will:
(i) Conduct its affairs and business only in the ordinary course of
business;
(ii) Not create or incur any liabilities other than current liabilities
incurred in connection with the transactions contemplated by this Agreement;
(iii) Not create or incur, or suffer to exist, any mortgage, lien, pledge,
hypothecation, charge, encumbrance, or restriction of any kind;
(iv) Not make any capital expenditures or capital additions or betterment
except as many be involved in ordinary repairs, maintenance, and replacement;
(v) Except in connection with the transactions contemplated by this
Agreement, not enter into, renew, extend, amend, or modify any contract or
commitment pursuant to which it will be obligated to expend, or entitled to
receive, in excess of $5,000 in amount;
(vi) Maintain its assets and properties in good condition and repair, and
not sell, lease, license, or otherwise dispose of any of its assets or
properties;
(vii) Not declare or pay any dividend on or make any other distribution
upon, or purchase, retire or redeem, any shares of Acquiror Common or Acquiror
Preferred, or set aside any funds for any such purpose;
(viii) Not issue or sell or obligate itself to issue or sell any additional
shares of Acquiror Common or Acquiror Preferred, whether or not such shares have
been previously authorized or issued, or issue or sell any warrants, rights, or
options to acquire any such shares, or acquire any stock of any corporation or
any interest in any business enterprise;
(ix) Not amend the Acquiror Articles or the Acquiror Bylaws;
(x) Not pay or agree to pay, conditionally or otherwise, any bonus, extra
compensation, pension, or severance pay to any director, stockholder, officer,
consultant, agent, or employee under any pension plan or otherwise, or increase
the compensation paid by it at the date of the Acquiror Balance Sheet (other
than as identified on Schedule 3.2(b)) to any officer, director, agent,
consultant, or employee;
(xi) Not discharge or satisfy any lien, charge or encumbrance, nor pay any
obligation or liability, absolute or contingent, except (i) current liabilities
shown on the Acquiror Balance Sheet or current liabilities incurred since said
date in the ordinary course of business and (ii) expenses incurred in connection
with the transactions contemplated by this Agreement (including, without
limitation, reasonable attorneys' fees, accounting fees, and costs);
(xii) Use reasonable commercial efforts to preserve its business
organization in tact;
(xiii) Except with respect to the transactions contemplated by this
Agreement, not merge or consolidate with or into, or acquire the assets of, with
or into any other entity;
(xiv) Use reasonable commercial efforts to preserve the goodwill of its
suppliers, customers, and those having business relations with it;
(xv) Not enter into any transactions or take any acts which if effected or
performed prior to the date of this Agreement, would constitute a breach of the
representations, warranties, and agreements contained herein; and
(xvi) Not institute, settle, or agree to settle any action or proceeding
before any court or governmental body;
(xvii) Not effect or agree to effect, including by way of hiring or
involuntary termination, any change in the directors, officers, or employees of
the Acquiror;
(xviii) Not take, or agree to take, any of the actions described in (i)
through (xvii) above, or any action that would make any of the representations,
covenants, or warranties of the Acquiror set forth herein untrue or incorrect.
(c) Access to Records. The Acquiror will afford Telegen, its
representatives, counsel, agents, and employees, at reasonable times and in a
manner and under circumstances which will not cause unreasonable interference
with the operation of the Acquiror's business, access to all of the properties
of the Acquiror and its books, files, records, insurance policies, and other
corporate books and records, for the purpose of audit, inspection, and
examination thereof, and will do, and cause the Acquiror to do, everything
reasonable necessary to enable the Acquiror to make a complete examination of
the assets and properties of the Acquiror and the condition thereof. No such
examination, however, shall constitute a waiver or relinquishment on the part of
the Acquiror of its right to rely upon the covenants, representations, and
warranties made by the Acquiror in the provisions of this Agreement.
(d) Consultation. The Acquiror will endeavor to keep Telegen apprised with
respect to the operation and conduct of the Acquiror's business prior to the
Closing Date.
Section 4.3 Fairness Hearing. The Acquiror Common and the Acquiror
Preferred to be issued pursuant to this Agreement will not be registered under
the 1933 Act in reliance on the exemption from registration set forth in Section
3(a)(10) thereof. Promptly following the execution of this Agreement, the
Acquiror shall file an application for permit (the "Permit") with the California
Department of Corporations for the purpose of qualification of the issuance of
the shares of Acquiror Common and Acquiror Preferred to be issued hereunder
pursuant to Section 25110 of California Law and in connection therewith shall
request that a hearing be held on the fairness of the transaction pursuant to
Section 25142 of California Law (the "Fairness Hearing") in order to qualify the
shares of Acquiror Common and Acquiror Preferred for the exemption from
registration provided in Section 3(a)(10) of the 1933 Act. Telegen shall use its
reasonable efforts to assist the Acquiror and its counsel in filing such
application to obtain the Permit. The Acquiror and Telegen shall each use its
best efforts to prosecute such application and hearing.
Section 4.4 Undertakings of Acquiror and Telegen.
(a) The Acquiror and Telegen each will hold, and will cause its respective
officers, directors, employees, consultants, advisors and agents to hold, in
confidence, unless compelled to disclose by judicial or administrative process
or by other requirements of law, all confidential documents and information
concerning the parties furnished to any other party in connection with the
transactions contemplated by this Agreement, except to the extent that such
information can be shown to have been (i) previously known on a non-confidential
basis by the disclosing party; (ii) in the public domain; or (iii) later
lawfully acquired by the closing party from sources other than as a result of
the transactions contemplated herein; provided that each party may disclose such
information to its officers, directors, employees, consultants, advisors and
agents in connection with the transactions contemplated by this Agreement, so
long as such persons are informed of the confidential nature of such information
and are directed to treat such information confidentially in accordance
herewith. Each party's obligation to hold any such information in confidence
shall be satisfied if it exercises the same care with respect to such
information as it would take to preserve the confidentiality of its own similar
information. Subject to the foregoing and Section 4.4(b) below, each party shall
keep confidential the terms of this Agreement and of the transactions
contemplated hereby except to the extent such information is legally required to
be disclosed. If this Agreement is terminated, such confidence shall be
maintained and each party will, and will use its best efforts to cause its
officers, directors, employees, consultants, advisors and agents to, destroy or
deliver to each other party, upon request, all documents and other materials,
and all copies thereof, obtained by such party in connection with this
Agreement, that are subject to such confidence. The parties obligations under
this Section 4.4(a) shall terminate on the Closing Date.
(b) No press release or other public disclosure of matters related to this
Agreement or any of the transactions contemplated hereby shall be made by the
Acquiror or Telegen unless the other parties shall have provided its consent to
the form and substance thereof; provided, however, that nothing herein shall be
deemed to prohibit any party hereto from making any disclosure which its counsel
deems necessary or advisable in order to fulfill such party's disclosure
obligations imposed by law.
(c) Each party shall provide the others with adequate opportunity to
conduct such reviews and examinations of the business, properties and conditions
(financial and otherwise) of the others as each party shall deem prudent,
provided that such investigations shall not interfere unreasonably with the
normal operations of the party being reviewed.
ARTICLE 5
CONDITIONS PRECEDENT
Section 5.1 Conditions to Obligations of Each Party to Effect the Merger.
The respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing Date of the
following conditions:
(a) Shareholder Approval. This Agreement and the Merger and the other
transactions contemplated hereby shall have been approved and adopted by the
vote or consent of the requisite number of shareholders of Telegen. Shareholders
of Telegen holding not less than 66-_% of the outstanding voting stock of
Telegen shall have delivered to Acquiror an agreement pursuant to which such
shareholders agree to vote all shares of Telegen Common or Telegen Preferred
held by such shareholders in favor of the Merger, this Agreement, the Merger
Agreement, and the transactions contemplated hereby and thereby. Each such
shareholder of Telegen shall, in connection with the execution and delivery of
such agreement, deliver to Acquiror an irrevocable proxy which shall cover all
shares of Telegen Common or Telegen Preferred held by such shareholder, which
shall be irrevocable to the maximum extent provided by California Law, and which
shall be executed in accordance with Section 705 of California Law. In addition,
approval of the shareholders of Acquiror, if and to the extent required under
the laws of the State of Colorado, shall also have been obtained.
(b) Government Approvals. All authorizations, consents, orders, or
approvals of, or declarations or filings with, or expiration of waiting periods
imposed by, any Governmental Entity necessary for the consummation of the
transactions contemplated by this Agreement, including but not limited to the
filing of the Merger Documents with the Secretary of State of California and the
issuance of the Permit by the California Department of Corporations, and such
requirements under applicable state securities laws, shall have been filed,
occurred, or been obtained, other than filings with and approvals by foreign
governments relating to the Merger if failure to make such filings or obtain
such approvals would not be materially adverse to Telegen or the Acquiror.
(c) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect, nor shall any proceeding brought
by an administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign, seeking any of the foregoing be pending;
nor shall there be any action taken, or any statute, rule, regulation, or order
enacted, entered, enforced, or deemed applicable to the Merger which makes the
consummation of the Merger illegal.
Section 5.2 Conditions Precedent to Obligations of Telegen. Except as may
be waived in writing by Telegen, the obligations of Telegen are subject to the
fulfillment, prior to or at the Closing on the Closing Date, of each of the
following conditions:
(a) No Material Errors. The representations and warranties of the Acquiror
in Section 3.2 hereof shall be true and correct in all material respects as of
the Closing Date, subject to any changes contemplated by this Agreement.
(b) Opinion of Acquiror's Counsel. The Acquiror shall have delivered to
Telegen the opinion, dated the Closing Date, of Acquiror's counsel, Cohen Brame
& Smith, P.C., in form attached hereto as Schedule 5.2(b).
(c) Directors' Approval. Consummation of the transactions contemplated
herein shall have been approved by the Board of Directors of Acquiror at special
meetings of the Board of Directors to be held for the purpose of obtaining such
approvals.
(d) Third-Party Consents. On or before the Closing Date, all material
consents or approvals by any third party, if any, which are required to be
obtained by Acquiror in connection with the execution, delivery or performance
of this Agreement or the consummation of the transactions contemplated herein
shall have been obtained.
(e) Compliance with Agreements. The Acquiror shall have performed and
complied with all agreements or conditions required by this Agreement to be
performed and complied with by it prior to or on the Closing Date.
(f) Certificate of Officers. The Acquiror shall have delivered to Telegen a
certificate dated the Closing Date, executed in its corporate name by, and
verified by, the oath of its President and Chief Financial Officer certifying to
the fulfillment of the conditions specified in this Section 5.1.
(g) Post-Closing Officers and Directors. The Acquiror shall have delivered
to Telegen the written resignations, effective as of the Closing, of all
officers and directors of Acquiror, and Acquiror shall have taken such actions
prior to the Closing as Telegen shall reasonably determine in order to appoint
persons designated by Telegen to such positions immediately after the Closing;
provided, however, that two of the directors designated by Telegen to be
appointed to the Board of Directors of Acquiror shall be independent directors,
as defined in the Rules of the National Association of Securities Dealers, Inc.,
and such independent directors shall be appointed to the Audit and Compensation
Committees of Acquiror's Board of Directors.
(h) Tax Opinion. Telegen shall have received from its legal counsel,
Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, an opinion, dated
the Closing Date, to the effect that the acquisition of Telegen by Acquiror
pursuant hereto will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code. In rendering
such opinion, counsel may rely upon representations and certificates of
Acquiror, Merger Sub, Telegen, and certain shareholders of Telegen.
(i) Indemnity and Share Escrow. James B. Wiegand shall have executed an
indemnity agreement in regard to breaches of representations and warranties or
covenants hereunder by Acquiror. Telegen's sole and exclusive recourse under
such indemnity agreement shall be to an escrow established for such purpose into
which Mr. Wiegand shall have contributed 70,000 shares of Acquiror Common Stock.
Mr. Wiegand and Telegen shall execute such indemnity agreement and escrow
agreement and shall have contributed such shares prior to the Closing Date.
Section 5.3 Conditions Precedent to Obligations of Acquiror. Except as may
be waived in writing by the Acquiror, all of the obligations of the Acquiror
under this Agreement are subject to fulfillment, prior to or at the Closing on
the Closing Date, of each of the following conditions:
(a) No Material Errors. The representations and warranties of Telegen in
Section 3.1 hereof shall be true and correct as of the Closing Date, subject to
any changes contemplated by this Agreement.
(b) Third-Party Consents. On or before the Closing Date, all material
consents or approvals by any third party, if any, which are required to be
obtained, including the Stockholders of Telegen in connection with the
execution, delivery or performance of this Agreement or the consummation of the
transactions contemplated herein shall have been obtained.
(c) Dissenters' Rights. Holders of Telegen Common or Telegen Preferred
representing no more than ten percent of Telegen's outstanding capital stock
shall have exercised, nor shall they continue to have the right to exercise
dissenters rights with respect to the transactions contemplated by this
Agreement.
(d) Compliance With Agreement. Telegen shall have performed and complied
with all agreements or conditions required by this Agreement to be performed and
complied with by them prior to or on the Closing Date.
(e) Certificate of Officers. Telegen shall have delivered to the Acquiror a
certificate, dated the Closing Date, executed in its corporate name by, and
verified by, the oath of its President or any Vice President and its Secretary
or an Assistant Secretary, certifying to the fulfillment of the conditions
specified in this Section 5.3 and certifying specifically as to the accuracy of
the Company's representations set forth in Sections 3.1(f)(i) and 3.1(i) and
that no contract of Telegen has been terminated if such termination would have a
Material Adverse Effect on Telegen.
(f) Opinion of Telegen's Counsel. Telegen shall have delivered to the
Acquiror an opinion of Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation, dated the Closing Date, in the form attached hereto as Schedule
5.3(f).
(g) Employment Agreements. Jessica Stevens, Warren Dillard, and Bonnie
Crystal shall all be living on the Closing Date, shall not be incapacitated so
as to render them unavailable for employment by the Acquiror and shall execute
or assign to the Acquiror on the Closing Date, Employment Agreements in the form
mutually acceptable to the Acquiror, Stevens, Dillard, and Crystal as set forth
on Schedule 5.3(g).
ARTICLE 6
POST-CLOSING COVENANTS
Section 6.1 Reports Under Securities Exchange Act of 1934. With a view to
making available to the Shareholders of Telegen the benefits of Rule 144 and 145
promulgated under the Act and any other rule or regulation of the SEC that may
at any time permit a Shareholder to sell securities of the Acquiror to the
public without registration, the Acquiror agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other documents
required of the Acquiror under the 1933 Act and the 1934 Act; and
(c) furnish to any Stockholder, so long as the Stockholder owns any Common
Stock, forthwith upon request (i) a written statement by the Acquiror that it
has complied with the reporting requirements of Rule 144, the Act and the 1934
Act, (ii) a copy of the most recent annual report of the Acquiror and such other
reports and documents so filed by the Acquiror, and (iii) such other information
as may be reasonably requested in availing any Stockholder of any rule or
regulation of the SEC which permits the selling of any such securities without
registration or pursuant to such form.
Section 6.2 Price Protection Provisions. During negotiations of this
Agreement, certain representations were made by Telegen to the Acquiror,
relating to its projected net earnings on a fully diluted post-Merger basis of
the combined companies, upon which Acquiror relied in determining the number of
shares to be issued to Telegen's shareholders. Based on these representations,
the parties hereto have agreed that additional shares will be issued to those
persons who are shareholders of Acquiror immediately prior to the Effective Time
if the closing bid price of Acquiror post-Merger (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 equal or exceed $2.00 per share on any ninety (90) trading
days over the period occurring between the Closing Date and December 31, 1997
(the "Price Protection Period"). If the closing bid price does not exceed $2.00
for any ninety (90) trading days over the Price Protection Period, then
additional shares will be issued under this Section 6.2 based on the average
closing bid price for those ninety (90) trading days during the Price Protection
Period with the highest average closing bid price (the "Bid Price Factor").
These additional shares will be issued from the Acquiror's authorized but
unissued Common Stock, and distributed to the shareholders set forth on Schedule
6.2 on a pro rata basis based on the number of shares owned by such shareholder
immediately prior to the Effective Time. The number of additional shares to be
distributed to the shareholders, if any, in accordance with Schedule 6.2, shall
be based on a formula whereby:
N = the number of shares to be issued
and
N = 1,308,758 x 2 - 1,308,758
Bid Price Factor
The Acquiror agrees to make a determination, pursuant to this provision,
within ten (10) days subsequent to December 31, 1997, and to issue the necessary
certificates on a pro rata basis, pursuant to Schedule 6.2, and to, at all times
pertinent hereto, maintain a reserve of authorized but unissued shares of not
less than 2,000,000 shares to fulfill this obligation (as adjusted for stock
splits and similar events). This provision shall automatically expire on the day
after the date the closing bid price has exceeded $2.00 per share for any ninety
(90) trading days during the Price Protection Period.
Section 6.3 Nasdaq Qualification. It is the understanding of the parties
hereto that, as soon as practicable subsequent to the Closing Date, the parties
will undertake such actions as will allow the Acquiror to qualify for a Nasdaq
listing.
ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER:
Section 7.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval of matters
presented in connection with the Merger by the shareholders of Telegen:
(a) by mutual consent of Telegen and the Acquiror;
(b) by either Telegen or the Acquiror if there has been a material breach
of any representation, warranty, covenant or agreement contained in this
Agreement on the part of the other party set forth in this Agreement and such
breach of a covenant or agreement has not been promptly cured;
(c) by either the Acquiror or Telegen if the Merger shall not have been
consummated before March 31, 1996;
(d) by either the Acquiror or Telegen if (i) there shall be a final
nonappealable order of a federal or state court in effect preventing
consummation of the Merger or (ii) there shall be any action taken, or any
statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger by any Governmental Entity which would make
consummation of the Merger illegal;
(e) by either the Acquiror or Telegen if there shall be any action taken,
or any statute, rule, regulation or order enacted, promulgated or issued or
deemed applicable to the Merger by any Governmental Entity, which would (i)
prohibit Telegen's or the Acquiror's ownership or operation of all or a material
portion of the business or assets of Telegen or the Acquiror , or compel the
Acquiror or Telegen to dispose of or hold separate all or a material portion of
the business or assets of Telegen or the Acquiror as a result of the Merger or
(ii) render the Acquiror or Telegen unable to consummate the Merger, except for
any waiting period provisions; or
(e) by either party if any required approval of the shareholders of Telegen
shall not have been obtained.
Where action is taken to terminate this Agreement pursuant to this Section
7.1, it shall be sufficient for such action to be authorized by the Board of
Directors of the party taking such action.
Section 7.2 Effect of Termination. In the event of termination of this
Agreement by either the Acquiror or Telegen as provided in Section 7.1, this
Agreement shall forthwith become void, and there shall be no liability or
obligation on the part of the Acquiror, Merger Sub, or Telegen, or their
respective officers or directors except as set forth in Sections 4.4(a) and 8.7
and except to the extent that such termination results from the willful breach
by a party hereto of any of its representations, warranties, covenants, or
agreements set forth in this Agreement.
Section 7.3 Amendment. This Agreement may be amended by the parties hereto
at any time before or after approval of matters presented in connection with the
Merger by the shareholders of Telegen and Merger Sub but, after any such
shareholder approval, no amendment shall be made which by law requires the
further approval of shareholders without obtaining such further approval. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto.
Section 7.4 Extension; Waiver. At any time prior to the Effective Time, any
party hereto, by action taken by its Board of Directors, may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto, and (iii) waive compliance
with any of the agreements or conditions for the benefit of such party contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid if set forth in an instrument in writing signed on behalf
of such party.
ARTICLE 8
MISCELLANEOUS
Section 8.1 Assignment. Neither this Agreement nor any right created hereby
shall be assignable by Telegen (or their successors in interest) or the Acquiror
without the prior written consent of the others. Nothing in this Agreement,
express or implied, is intended to confer upon any person, other than the
parties hereto and their respective successors, assigns, heirs, executors,
administrators, or personal representations, any rights or remedies under or by
reason of this Agreement.
Section 8.2 Notices. Any notice, communication, request, reply, or advice,
hereinafter severally and collectively called "notice," in this Agreement
provided or permitted to be given, made, or accepted by either party to the
other must be in writing and may be given or be served by depositing the same in
the United States mail, addressed to the party to be notified, postage prepaid
and registered or certified with return receipt requested, or by delivering the
same in person to an officer of such party. Notice deposited in the mail in the
manner hereinabove described shall be effective only if and when received by the
parties to be notified. For purposes of notice the addresses of the parties
shall, until changed as hereinafter provided, be as follows:
(a) If to Acquiror:
James Wiegand, President
Solar Energy Research Corp.
10075 East County Line Road
Longmont, Colorado 80501
with a copy to:
Roger V. Davidson, Esq.
Cohen Brame & Smith, P.C.
1700 Lincoln Street, Suite 1800
Denver, Colorado 80203
(b) If to Telegen:
Warren M. Dillard
Chief Operating and Financial Officer
Telegen Corporation
353 Vintage Park Drive
Foster City, California 94404
with a copy to:
Thomas C. DeFilipps, Esq.
Wilson, Sonsini, Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
or at such other addresses as any party may have advised the others in
writing.
Section 8.3 Paragraph and Other Headings. Paragraph and other headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement.
Section 8.4 Severability. In the event that any one or more of the
provisions contained in this Agreement shall for any reason be held to be
invalid, illegal, or unenforceable in any respect, such invalidity, illegality,
or unenforceability shall not affect other provisions of this Agreement, but
this Agreement shall be constructed as if such invalid, illegal, or
unenforceable provisions had never been contained therein.
Section 8.5 California Law to Apply. This Agreement shall be construed
under and in accordance with the laws of the State of California as applied to
agreements between California residents entered into and to be performed
entirely within California.
Section 8.6 Parties in Interest. This Agreement shall be binding on and
inure to the benefit of and be enforceable by the stockholders and the Acquiror,
their respective heirs, executors, administrators, legal representatives,
successors, and assigns except as otherwise expressly provided herein.
Section 8.7 Cancellation by Telegen. Should this Agreement be cancelled by
Telegen prior to Closing, for any reason other than a failure of Acquiror to
cure a breach of its representations and warranties contained in Section 3.2 or
to timely close, then Telegen shall promptly reimburse to Acquiror all expenses
incurred by Acquiror on its behalf, and advanced to Telegen, to assist Telegen
in the completion of this Agreement, including its legal and accounting fees, in
order to compensate Acquiror for its efforts and expenses prior to cancelling or
terminating this transaction. Any dispute relative to a breach by Acquiror, or
in the amount of the reimbursement (which shall not exceed $100,000), shall be
submitted to binding arbitration by the American Arbitration Association in
Denver, Colorado, in accordance with the rules then pertaining. Any decision by
the arbitration panel may include the expenses and attorneys' fees of the
successful party, and such decision shall be final and may be made a judgment of
any court of competent jurisdiction. Should arbitration proceedings be commenced
and Telegen desire to complete an alternate transaction pending the arbitration
award, Telegen may do so on the condition that it shall deposit into escrow, in
accordance with escrow terms approved by the parties hereto and the arbitration
panel, all of the outstanding claimed expenses of the Acquiror, not to exceed
$100,000, plus $15,000 to cover the possibility of an award of attorneys' fees
and the arbitration expenses. The escrow provision shall provide that the escrow
shall break and the funds shall be delivered by the escrow agent to the party in
accordance with the award of the arbitration panel, or upon a settlement of the
dispute by the parties hereto.
Section 8.8 Attorneys' Fees. If any action at law or in equity, including
an action for declaratory relief, is brought to enforce or interpret the
provisions of this Agreement, the prevailing party shall be entitled to recover
reasonable attorney's fees from the other party, which fees may be set by the
court in the trial of such on or may be enforced in a separate action brought
for that purpose, and which fees shall be in addition to any other relief which
may be awarded.
Section 8.9 Counterparts. This Agreement and all other copies of this
Agreement insofar as they relate to the rights, duties, and remedies of parties,
shall be deemed to be one agreement. This Agreement may be executed concurrently
in one or more counterparts, each which shall be deemed an original, but all
which together shall constitute one and the same instrument. Facsimile
signatures shall be treated as original until replaced by the original copy
which shall then be substituted.
Section 8.10 Integrated Agreement. This Agreement constitutes the entire
agreement between the parties hereto, and there are no agreements,
understandings, restrictions, warranties, or representations between the parties
other than those set forth herein or herein provided for.
IN WITNESS WHEREOF, this Agreement and Plan of Reorganization has been
executed the day and year set forth above.
ACQUIROR:
SOLAR ENERGY RESEARCH CORP.
By:
James B. Wiegand, President
TELEGEN:
TELEGEN CORPORATION
By:
Jessica L. Stevens, President
MERGER SUB:
TELEGEN ACQUISITION CORPORATION
By:
James B. Wiegand, President
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION]
FIRST AMENDMENT
DATED AS OF JANUARY 18, 1996
TO THE
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
SOLAR ENERGY RESEARCH CORP.,
TELEGEN CORPORATION AND
TELEGEN ACQUISITION CORPORATION
WHEREAS, the parties hereto desire to amend certain provisions of that
certain Agreement and Plan of Reorganization by and among Solar Energy Research
Corp. ("Acquiror"), Telegen Corporation ("Telegen") and Telegen Acquisition
Corporation ("Merger Sub") dated November 16, 1995 ("Reorganization Agreement")
in order to provide for, among other things, (i) the addition of the conditions
that the Shareholders of the Acquiror shall have approved a 7.25 reverse stock
split of its capital stock and a name change to Telegen Corporation effective
upon the closing as conditions precedent to the obligation of Telegen to effect
the closing; (ii) the increase from $100,000 to $130,000 in the amount Telegen
shall reimburse to Acquiror should Telegen cancel the Reorganization Agreement
for any reason other than a failure of Acquiror to cure a breach of its
representations and warranties or to promptly close; (iii) the extension of the
date beyond which either Acquiror or Telegen may terminate the Reorganization
Agreement from March 31, 1996 to April 30, 1996; (iv) the addition to the
Telegen Schedule of information relating to a private placement of Telegen
Common Stock pursuant to a letter of engagement with Capitol Bay Securities,
Inc. to offer up to 1,200,000 shares of the Common Stock of Telegen at an
offering price of $5.00 per share; and (v) the completed addition to the
Acquiror's year end Shareholder List relating to issuance of an aggregate of
125,000 shares of Acquiror Common Stock and agreements to issue up to 17,500
shares of Acquiror Common Stock to James Wiegand and up to 7,500 shares of
Acquiror Common Stock to Norrlanska Kross, Inc. at the end of each quarter, in
lieu of any unpaid salary and fees for services, respectively.
AGREEMENT
NOW, THEREFOR, pursuant to Section 7.3 of the Reorganization Agreement, the
undersigned being the parties to the Reorganization Agreement, hereby agree to
the following amendments (together "Amendment") to the Reorganization Agreement:
1 . Section 5.2 is hereby amended by adding the following entry immediately
following 5.2(i):
" (j) Reverse Split of Acquiror Common Stock. The shareholders of the
Acquiror shall have approved a 7.25 to 1 reverse stock split of all outstanding
Acquiror Common Stock to be effective upon the Closing.
(k) Change of Name of Acquiror. The shareholders of the Acquiror shall have
approved a name change to "Telegen Corporation" to be effective upon the
Closing."
2. Section 7.1(c) is hereby amended in its entirety and is amended by
substituting therefore the following:
" (c) by either the Acquiror or Telegen if the Merger shall have not been
consummated before April 30, 1996 (except that the deadline shall be further
extended automatically because of delays caused as a result of governmental
shutdowns or other acts of God or government beyond the control of the parties
hereto or their counsel)."
3 . Section 8.7 is hereby amended in its entirety and is amended by
substituting therefore the following:
" Section 8.7 Cancellation by Telegen. Should this Agreement be canceled by
Telegen prior to Closing, for any reason other than a failure of Acquiror to
cure a breach of its representations and warranties contained in Section 3.2 or
to timely close, or should the shareholders executing Voting Agreements in the
form attached hereto as Exhibit A fail to vote their shares in favor of the
Agreement which failure should cause the Agreement not to be approved, then
Telegen shall promptly reimburse to Acquiror all expenses incurred by Acquiror
on its behalf, and advanced to Telegen, to assist Telegen in the completion of
this Agreement, including its legal and accounting fees, in order to compensate
Acquiror for its efforts and expenses prior to canceling or terminating this
transaction. Any dispute relative to a breach by Acquiror, or in the amount of
the reimbursement (which shall not exceed $130,000), shall be submitted to
binding arbitration by the American Arbitration Association in Denver, Colorado,
in accordance with the rules then pertaining. Any decision by the arbitration
panel may include the expenses and attorneys' fees of the successful party, and
such decision shall be final and may be made a judgment of any court of
competent jurisdiction. Should arbitration proceedings be commenced and Telegen
desire to complete an alternate transaction pending the arbitration award,
Telegen may do so on the condition that it shall deposit into escrow, in
accordance with escrow terms approved by the parties hereto and the arbitration
panel, all of the outstanding claimed expenses of the Acquiror, not to exceed
$130,000, plus $15,000 to cover the possibility of an award of attorneys' fees
and the arbitration expenses. The escrow provision shall provide that the escrow
shall break and the funds shall be delivered by the escrow agent to the party in
accordance with the award of the arbitration panel, or upon a settlement of the
dispute by the parties hereto."
4 . Section 5.1(a) is hereby amended in its entirety and is amended by
substituting therefore the following:
" (a) Shareholder Approval. This Agreement and the Merger and the other
transactions contemplated hereby shall have been approved and adopted by the
vote or consent of the requisite number of shareholders of Telegen. Shareholders
of Telegen holding not less than 66-_% of the outstanding voting stock of
Telegen shall have delivered to Acquiror an agreement in the form attached to
this Agreement as Exhibit A ("Voting Agreement") pursuant to which such
shareholders agree to vote all shares of Telegen Common or Telegen Preferred
held by such shareholders in favor of the Merger, this Agreement, the Merger
Agreement, and the transactions contemplated hereby and thereby. In addition,
approval of the shareholders of Acquiror, if and to the extent required under
the laws of the State of Colorado, shall also have been obtained."
5 . Section 5.2(i) is hereby amended in its entirety and is amended by
substituting therefore the following:
" (i) Indemnity and Share Escrow. James B. Wiegand shall have executed an
indemnity agreement in the form attached to this Agreement as Exhibit B
("Indemnification Agreement") in regard to breaches of representations and
warranties or covenants hereunder by Acquiror. Telegen's sole and exclusive
recourse under such Indemnity Agreement shall be to an escrow established for
such purpose into which Mr. Wiegand shall have contributed 70,000 shares of
Acquiror Common Stock, which number of shares is subject to adjustment from
stock splits or other adjustments. Mr. Wiegand and Telegen shall execute such
Indemnity Agreement and an escrow agreement in the form attached to this
Agreement as Exhibit C ("Escrow Agreement") and shall have contributed such
shares, as adjusted, prior to the Closing Date."
6 . Schedule 3.1(f) is hereby amended in its entirety and is amended by
substituting therefore the following:
"Schedule 3.1(f)
Bridge Loan and Consulting Agreement
On October 23, 1995, Telegen entered into a "Bridge Loan and Consulting
Agreement" with Pacific Acquisition Group, Inc. ("PAG") under which PAG will
assist Telegen in obtaining up to $575,000 of new capital in the form of
one-year notes bearing interest at 15% per annum. Telegen will additionally
grant the purchasers of the notes Common Stock of Telegen in an amount equal to
1% of the outstanding stock of Telegen if all the notes are subscribed, such
additional consideration to total 28,045 shares if the loan program is fully
subscribed. Further, Telegen will pay to brokers placing the notes commissions
of 15% of the gross amount raised and will pay to PAG Common Stock of Telegen
equal to 1.9% of the outstanding stock of Telegen for its services in the
placement of these notes, such additional consideration to total 53,775 shares
if the loan program is fully subscribed.
Private Placement of Telegen Common Stock
Upon completion of the bridge loan offering, PAG will directly or through
an affiliate arrange for a private placement of the Common Stock of Telegen
adequate to net Telegen $5 million, and for such services be compensated by a
grant of Common Stock of Telegen equal to 2% of the then outstanding stock
(estimated to be approximately 100,000 shares), the details of which are more
particularly outlined in the Bridge Loan and Consulting Agreement.
On December 28, 1995, Telegen entered into a letter of engagement with
Capitol Bay Securities, Inc. ("Capitol"), an affiliate of PAG for the purposes
above, to offer up to 1,200,000 shares of the Common Stock of Telegen at an
offering price of $5.00 per share, and that Capitol be compensated with a cash
commission of 15% of the funds raised, less all expenses of the offering, plus
warrants to purchase a number of shares equal to 10% of those shares actually
sold (up to a maximum of 120,000 shares of the Common Stock of Telegen), such
warrants exercisable at $3.50 per share. Further, Telegen will issue 136,000
shares of its Common Stock as compensation to Capitol and other finders."
Common Stock or Option Grants
Telegen may grant up to 20,000 shares of Common Stock or options to
purchase Common Stock to certain employees or consultants as compensation for
services rendered prior to December 31, 1995.
7. Schedule 3.2(c) is hereby amended by adding the following entry:
"In addition to the shareholders listed in the Shareholders List, which was
Schedule 3.2(c), since November 16, 1995, the following shares of SERC have been
issued:
To J.B. Wiegand (salary) - 17,500
To Norrlanska Kross, Inc. (services) - 7,500
100,000 shares to private placement
participants, as follows:
Larry Johnson - 20,000
Lo Family Limited Partnership - 40,000
Yu-Chinh Chen - 40,000
SERC has agreements to issue up to 17,500 shares to Mr. Wiegand and up to
7,500 shares to Norrlanska Kross, Inc. at the end of each quarter, in lieu of
any unpaid salary and fees for services, respectively."
8. Price Protection Provisions. Section 6.2 shall be amended to update the
formula to account for the issuance of additional shares of the Acquiror as
follows:
"N = 1,363,850 x 2 - 1,363,850"
Bid Price Factor
Additionally, upon putting into effect the proposed reverse split of
Acquiror's Common Stock, the parties acknowledge that the number of shares and
the price protection are subject to automatic adjustment.
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IN WITNESS WHEREOF, the undersigned have executed this Amendment to the
Reorganization Agreement as of the date first written above.
ACQUIROR:
SOLAR ENERGY RESEARCH CORP.
By:
James B. Wiegand, President
TELEGEN:
TELEGEN CORPORATION
By:
Jessica L. Stevens, President
MERGER SUB:
TELEGEN ACQUISITION CORPORATION
By:
James B. Wiegand, President
SIGNATURE PAGE TO AMENDMENT TO AGREEMENT
AND PLAN OF REORGANIZATION
SECOND AMENDMENT DATED AS OF APRIL 9, 1996
TO THE AGREEMENT AND
PLAN OF REORGANIZATION BY AND AMONG
SOLAR ENERGY RESEARCH CORP.
TELEGEN CORPORATION AND
TELEGEN ACQUISITION CORPORATION
WHEREAS, the parties hereto desire to amend certain provisions of that
certain Agreement and Plan of Reorganization by and among Solar Energy Research
Corp. ("Acquiror"), Telegen Corporation ("Telegen") and Telegen Acquisition
Corporation ("Merger Sub") dated November 16, 1995 ("Reorganization Agreement")
in order to provide among other things:
(i) the addition of the conditions that a registration statement on Form
S-4 must be filed by Acquiror, be declared effective by the Commission and
shareholder approval of Acquiror shall be obtained prior to closing as
conditions precedent to the obligation of Telegen to effect the closing;
(ii) providing for the reincorporation of Acquiror as a California
corporation at or prior to the Effective Time of the Merge and substituting the
newly formed California corporation as the corporatoin subject to the reporting
requirements of the '34 Act;
(iii) the increase from $130,000 to $200,000 in the amount Telegen shall
reimburse to Acquiror should Telegen cancel the Reorganization Agreement for any
reason other than failure of Acquiror to cure a breach of its representations
and warranties or to promptly close and permitting additional fund raising
activity on behalf of both Acquiror and Telegen;
(iv) the extension of the date beyond which either Telegen or Acquiror may
terminate the Reorganization Agreement from April 30, 1996 to August 31, 1996;
and
(v) the addition to the Telegen financial statements of the audit for the
year ended December 31, 1995.
NOW THEREFORE, pursuant to Section 7.3 of the Reorganization Agreement, the
undersigned being the parties to the Reorganization Agreement, hereby agree to
the following amendments (together "Second Amendment") to the Reorganization
Agreement as amended:
1. Section 1.7 - Dissenting Shareholders shall be deleted in its entirety.
Additionally, any provision elsewhere in the Agreement relating to dissenting
shareholders shall be treated as having been deleted.
2. Section 2.1 - The Closing and Closing Date shall be amended by deleting
the first paragraph and replacing it as follows:
The closing ("Closing") shall be held at the offices of Cohen Brame & Smith
Professional Corporation on Friday, July 12, 1996 or such other date as the
parties shall agree after (i) the Securities and Exchange Commission (the
"Commission") has declared the Acquiror's registration statement on Form S-4
effective, (ii) all Blue Sky filings including registration and/or exemption in
those states where Telegen shareholders reside have been declared effective or
otherwise are in effect, (iii) the Acquiror having received approval of all
matters submitted to a shareholder vote pursuant to the Registration/Information
Statement on Form S-4 and (iv) the Acquiror having accomplished a
reincorporation pursuant to the laws of the state of California (the "Closing
Date").
3. Section 3.1(e) - Financial Statements shall be amended by deleting the
first paragraph and replacing it as follows:
Telegen has furnished the Acquiror with audited financial statements of
Telegen as of December 31, 1994 and 1995. All such financial statements present
fairly the financial condition of Telegen at such date, and the results of its
operations for the period therein specified and the audited financial statements
were prepared in accordance with generally accepted accounting principles
applied upon a basis consistent with prior accounting periods. Telegen's audited
balance sheet at December 31, 1995 is hereinafter referred to as "Telegen
Balance Sheet," and all such financial statements are hereinafter referred to as
the "Telegen Financial Statements."
4. Section 4.3 shall be amended by deleting it in its entirety and
replacing it with the following:
Registration of Acquiror's Shares. The Acquiror Common and the Acquiror
Preferred to be issued pursuant to this Agreement will be registered pursuant to
the 33 Act as part of a Registration Information Statement on Form S-4. Promptly
following the execution of this Second Amendment, the Acquiror shall draft the
Registration/Information Statement and deliver such draft to Telegen for its
review. Once Acquiror has obtained the agreement of Telegen to file the
Registration/Information Statement, it shall promptly take what action is deemed
necessary to accomplish same and use its best efforts to have said
Registration/Information Statement declared effective at the earliest
practicable date. Telegen agrees to use its best efforts to provide Acquiror
with all information necessary to accomplish Acquiror's obligation pursuant to
this section 4.3 including the delivery of the Telegen Financial Statements and
necessary reports and consents of its auditors. Acquiror agrees to deliver to
Telegen copies of each filing of the Registration/Information Statements,
including all correspondence it receives from the Commission and Telegen agrees
to cooperate fully with Acquiror's efforts to respond to any comments received
from the Commission in order to allow it to refile the Registration/Information
Statement expeditiously.
5. Article 5 - Conditions Precedent shall be amended generally to delete
reference to any requirements for shareholder approval of the transaction on
behalf of Telegen, the requirement for the receipt of a permit from the
California Department of Corporations and any reference to dissenter's rights on
behalf of the shareholders of Telegen.
6. Schedule 3.1(f) shall be allowed to be further amended to provide for
the issuance of an additional 400,000 shares of common stock and additional
shares as may be necessary compensation to the Placement Agent to raise an
additional $3,000,000 in a private placement. Additionally, authority is hereby
given to Telegen to complete the sale of up to 10% of its subsidiary, Telegen
Display Laboratories, Inc., for $5,000,000 at or prior to the Closing Date.
7. Section 6.2 shall be amended as necessary to reflect additional shares
being issued and outstanding as a result of funds being raised by Acquiror to
pay the additional expenses of the parties to the Agreement, as amended, up to a
total of 400,000 common shares ($200,000). The parties agree that the Acquiror
shall be permitted to amend Schedule 3.2(c) at or immediately prior to Closing
to reflect the final capitalization of Acquiror.
8. Section 7.1(c) shall be amended to read as follows:
"by either the Acquiror or Telegen if the Merger shall not have been
consummated before August 31, 1996."
9. Section 8.7 - Cancellation by Telegen shall be amended as necessary to
provide that "$200,000" shall be substituted wherever the amended agreement sets
forth "$130,000."
IN WITNESS WHEREOF, the undersigned have executed this Second Amendment to
the Reorganization Agreement as of the date first written above.
ACQUIROR:
SOLAR ENERGY RESEARCH
By:______________________________
James B. Wiegand, President
TELEGEN:
TELEGEN CORPORATION CORP.
By:______________________________
Jessica L. Stephens, President
MERGER SUB:
TELEGEN ACQUISITION CORPORATION
CORPORATION
By:_____________________________________
James B. Wiegand, President
SIGNATURE PAGE TO AMENDMENT TO AGREEMENT
AND PLAND OF REORGANIZATION
ARTICLES OF AMENDMENT
to the
ARTICLES OF INCORPORATION
of
SOLAR ENERGY RESEARCH CORP.
Pursuant to the provisions of the Colorado Corporation Code the undersigned
Corporation adopts the following Articles of Amendment to its Articles of
Incorporation:
FIRST: The name of the Corporation is Solar Energy Research Corp.
SECOND: The following amendments to the Articles of Incorporation were
adopted by the Stockholders of the Corporation on January 7, 1994, in the manner
prescribed by the Colorado Corporation Code:
Article FOURTH of the Articles of Incorporation of Solar Energy Research
Corp. is hereby amended to increase the par value of the Company's Common Stock
to $0.50 per share, which amendment shall be effected immediately and
simultaneously with the one-for-fifty reverse split.
Article FOURTH of the Articles of Incorporation is hereby repealed so that
Article FOURTH would read in its entirety as follows:
FOURTH, The total number of shares of stock which the Corporation shall
have authority to issue is one hundred twenty five million (125,000,000) divided
into one hundred million (100,000,000) shares of Common Stock with a par value
of $.50 per share and twenty five million (25,000,000) shares of voting
Preferred Stock with no par value.
Article NINTH, sub-section 4, of the Articles of Incorporation of Solar
Energy Research Corp. is hereby amended to reduce the necessary vote of
shareholders from two-thirds of the outstanding shares to a majority of the
outstanding shares.
A new Article, ELEVENTH, is hereby added to the Articles of Incorporation
of Solar Energy Research Corp. as follows:
ELEVENTH, VOTING OF SHAREHOLDERS. With respect to any action to be taken by
shareholders by this Corporation, a vote or concurrence of the holders of a
majority of the outstanding shares of the shares entitled to vote thereon, or of
any class or series, shall be required.
THIRD: The number of shares of the Corporation outstanding at the time of
such adoption was 37,100,327 shares and the number of shares entitled to vote
thereon was 37,100,327 shares.
FOURTH: The designation and number of outstanding shares of each class
entitled to vote thereon as a class were as follows: none.
FIFTH: The number of shares voted for the amendment were:
Increase Par Value 24,873,411
Authorize Voting Preferred 24,873,411
Additional Common 24,873,411
Adopt Majority Vote 24,873,411
The number of shares voted against the amendment were:
Increase Par Value -0-
Authorize Voting Preferred -0-
Additional Common -0-
Adopt Majority Vote -0-
SIXTH: The number of shares of each class entitled to vote thereon as a
class for or against the amendments was: none.
SEVENTH: The manner if not set forth in such amendment, in which any
exchange, reclassification or cancellation of issued shares provided for in the
amendment shall be effected, is as follows:
The Company's transfer agent is immediately authorized by virtue of the
one-for-fifty reverse split to exchange all share certificates of $.01 par value
common stock presented for $.50 par value share certificates. The transfer agent
is authorized to charge ten dollars for each certificate issued. Shareholder
payments for exchange are to be made by check payable to United Stock Transfer,
Inc. and are to accompany the tendered share certificate. Any fractional shares
will be rounded up.
EIGHTH: The manner in which such amendments effect a change in the amount
of stated capital, and the amount of stated capital as changed by such
amendments, are as follows:
Stated capital is unchanged as a result of the increase in par value.
Dated as of the 7th day of January, 1994.
SOLAR ENERGY RESEARCH CORP.
By
Janet S. Collins, Secretary James B. Wiegand, President
CERTIFICATE OF CORRECTION
TO THE ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION OF
SOLAR ENERGY RESEARCH CORP.
This Certificate of Correction is being filed pursuant to C.R.S. 7-10-205
(formerly 7-2-115) of the Colorado Business Corporation Act. The following
changes should be made to the original Articles of Amendment to the Articles of
Incorporation for Solar Energy Research Corp.
1. Article IV fails to completely set forth the proposal which was approved
by the shareholders at the Special Meeting of Shareholders held on January7,
1994 and should therefore be amended as set forth below:
Fourth: The aggregate number of shares which this corporation shall have
the authority to issue is One Hundred Million (100,000,000) shares, with a par
value of $.50 per share, which shares shall be designated common stock. No share
shall be issued until it has been paid for, and it shall thereafter be
nonassessable. The corporation may also issue up to Twenty-Five Million
(25,000,000) shares of no par value preferred stock. The preferred stock of the
corporation shall be issued in one or more series as may be determined from time
to time by the Board of Directors. In establishing a series, the Board of
Directors shall give to it a distinctive designation so as to distinguish it
from the shares of all other series and classes, shall fix the number of shares
in such series, and the preferences, rights and restrictions thereof. All shares
in a series shall be alike. Each series may vary in the following respects: (1)
the rate of the dividend; (2) the price at the terms and conditions on which
shares shall be redeemed; (3) the amount payable upon shares in the event of
involuntary liquidation; (4) the amount payable upon shares in the event of
voluntary liquidation; (5) sinking fund provisions for the redemption of shares;
(6) the terms and conditions on which shares may be converted if the shares of
any series are issued with the privilege of conversion; and (7) voting powers.
Dated this 11th day of October, 1995.
SOLAR ENERGY RESEARCH CORP.,
a Colorado corporation
By:
James B. Wiegand, President
ATTEST:
By:
Janet S. Collins, Secretary
BY-LAWS OF SOLAR ENERGY RESEARCH CORP.ARTICLE I
Offices
Section 1. Principal Office. The principal place of business of the
corporation shall be Longmont, Colorado.The corporation may also have one or
more offices at such other place or places within or without the State of
Colorado as the Board of Directors may from time to time determine or as the
business of the corporation may require. Section 2. Registered Office. The
registered office of the corporation shall be as set forth in the Articles of
Incorporation, unless changed as provided by the Colorado Corporation
Code.ARTICLE II Section 1. Stock Certificates. The certificates for shares of
the capital stock of the corporation shall be in such form, not inconsistent
with the Colorado Corporation Code and the Articles of Incorporation, as shall
be approved by the Board of Directors. Each certificate shall be signed by the
President or a Vice President and also by the Secretary or an Assistant
Secretary. All certificates shall be consecutively numbered and the names of the
persons owning shares represented thereby, with the number of such shares and
the date of issue, shall be entered on the corporation's books. In case any
officer or officers who shall have signed a certificate ceases to hold such
office prior to the issuance or delivery of the certificate, whether because of
death, resignation, or otherwise such certificate may nevertheless be issued and
delivered by the corporation as though the officer who signs such certificate,
or whose facsimile signature shall have been used thereon, had not cease to be
such officer of the corporation. Section 2. Transfer of Stock. Transfers of the
shares of the corporation shall be made only on the books of the corporation by
the registered holder thereof, or by his attorney thereunto authorized by Power
of Attorney duly executed and filed with the Secretary and upon the surrender of
certificate or certificates for such shares. The corporation, under the articles
of Incorporation, has the right to impose restrictions upon the transfer of any
shares of stock of the corporation, or any interest therein, from time to time
issued, and any transfer or transfers of any of the shares of the stock of the
corporation, or any interest therein, shall be made in accordance with the
subject to any such restrictions from time to time so imposed. Section 3. Lost
and Destroyed Certificates. In case any certificate of stock of the corporation
shall be alleged to have been destroyed or lost, the corporation shall not be
required to issue a new certificate in lieu thereof, except upon receipt of
evidence satisfactory to the Board of Directors of the destruction or the loss
of such certificate, and if so required by the Board of Directors, upon receipt
also on a bond in such sum as the Board of Directors may direct, not exceeding
double the value of such stock, and if so required, with surety or sureties
satisfactory to the Board, to indemnify the corporations against any claim that
may be made against it on account of the alleged destruction or loss of such
certificate. Section 4. Dividends. The Board of Directors may, from time to
time, declare and the corporation may pay dividends on its outstanding shares in
cash, property, or its own shares, except when the corporation is insolvent or
when the declaration or payment thereof would be contrary to any restrictions
contained in the Articles of Incorporation or the laws of the State of Colorado.
Before payment of any dividend, there may be set aside out of any funds of the
corporation available for dividends such sum or sums as the directors, from time
to time, in their absolute discretion, think proper as a reserve fund to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the corporation, or for such other purpose as the directors shall
think conductive to the interest of the corporation, and the directors may
abolish any such reserve in the manner in which it was created. ARTICLE
IIIStockholders and Meetings
Section 1. Annual Meeting. The annual meeting of shareholders of the
corporation for the election of directors to succeed those whose terms expire
and for the transaction of such other business as may come before the meeting
shall be held each year on the 4th day of June, at 2:00 o'clock p.m. If the day
so fixed for such annual meeting shall be a legal holiday, then such meeting
shall be held on the next succeeding business day.
Section 2. Special Meetings. Special meetings of shareholders for any
purpose or purposes, unless otherwise prescribed by the Colorado Corporation
Code or by the articles of incorporation, may be called at any time by the
President, or the Board of Directors, and shall be called by the President or
Secretary upon the request (which shall state the purpose or purposes thereof)
of the holders of not less than one-tenth (1/10th) of the outstanding shares of
the corporation entitled to vote at the meeting.
Section 3. Place of Meeting. Meetings of shareholders, whether annual or
special, shall be held at the principal office of the corporation or at such
other place or places, within or without the State of Colorado, as may be from
time to time determined by the Board of Directors.
Section 4. Notice of Meetings. Notice of each meeting of shareholders,
whether annual or special, shall be given not less than ten (10) days or more
than fifty (50) days prior thereto to each shareholder of record entitled to
vote thereat by delivering written or printed notice thereof to such shareholder
personally or by mailing the same to his address as it appears on the stock
transfer book of the corporation; provided, however, that if the authorized
shares of the corporation are proposed to be increased, at least thirty (30)
days' notice in like manner shall be given. If mailed, such notice shall be
deemed to be delivered when deposited in the United States mail, properly
addressed to the shareholder, with postage thereon prepaid. The notice of a
special meeting shall, in addition, state the purposes thereof, and not other
business shall be transacted at such special meeting unless it is in accord with
the purpose or purposes stated in such notice.
Section 5. Record Date Closing Stock Books. The Board of Directors may fix
in advance a date, not less than ten (10) nor more than fifty (50) days
preceding the date of any meeting of shareholders, or the day for payment of any
dividend, or the date for the allotment of rights or the date when any change or
conversion or exchange of authorized shares shall go into effect, or a date
fixed as the final date for obtaining such consent, or a record date for the
determination of the shareholders entitled to notice thereof, and to vote at,
any such meeting and any adjournment thereof, if entitled to receive any such
dividend, or to any such allotment of rights, or to exercise the rights in
respect of any such change, conversion, or exchange of capital stock, or to give
such consent, and in such case any such shareholders as shall be shareholders of
record on the date so fixed shall be entitled to notice of, and to vote at, such
meeting and any adjournment thereof, or to receive payment of such dividend, or
to receive such allotment of rights, or to exercise such rights, or to give
consent, as the case may be, notwithstanding any transfer of any shares on the
books of the corporation after such record date fixed as aforesaid. The Board of
Directors may alternatively order the stock transfer books of the corporation
closed against transfers of shares during the whole or any part of the period of
not less than ten (10) nor more than fifty (50) days prior to the date of a
stockholders' meeting, the date when the right to any dividend, distribution, or
allotment or rights vest, or the effective date of any change, conversion, or
exchange of shares.
Section 6. Shareholders Entitled to Vote. Registered shareholders only
shall be entitled to be treated by the corporation as holders in fact of the
stock standing in their respective names; and the corporation shall not be bound
to recognize any equitable or other claim to or interest in any shares on the
part of any person, firm, or corporation, whether or not it shall have express
or other notice thereof, except as expressly provided by the laws of the State
of Colorado.
Section 7. Adjourned Meetings and Notice Thereof. Any shareholders'
meeting, annual or special, whether or not a quorum is present, may be adjourned
from time to time by the vote of majority of the shares, the holders of which
are either present in person or represented by proxy thereat, but in the absence
of a quorum no other business may be transacted at such meeting; provided,
however, that any one adjournment may be for a period not to exceed sixty (60)
days. When any shareholders' meeting, either annual or special, is adjourned for
thirty (30) days or more, notice of the adjourned meeting shall be given as in
the case of an original meeting. Save as aforesaid, it shall not be necessary to
give any notice of any adjournment or of the business to be transacted at the
adjourned meeting other than by announcement at the meeting at which such
adjournment is taken.
Section 8. List of Shareholders. A complete list of the shareholders
entitled to vote at any meeting or any adjournment thereof, arranged in
alphabetical order, with the address of and the number of shares held by each,
shall be prepared by the officer or agent having charge of the stock transfer
books at least ten (10) days before each meeting of shareholders. Such
shareholder list, for a period of ten (10) days prior to such meeting, shall be
kept on file at the principal office of the corporation, whether within or
without Colorado, and shall be subject to inspection by any shareholder at any
time during usual business hours. Such list shall also be produced and kept open
at the time and place of the meeting and shall be subject to the inspection of
any shareholder during the whole time of the meeting. The original stock
transfer books shall be prima facie evidence as to the shareholders who are
entitled to examine such list of stock transfer books or to vote at any meetings
of shareholders.
Section 9. Quorum. The holders of a majority of the shares issued and
outstanding and entitled to vote thereat shall, when present in person or
represented by proxy, be requisite to and shall constitute a quorum at all
meetings of shareholders for the transaction of business except as otherwise
provided by statute, or by the Articles of Incorporation. If a quorum is
present, the affirmative vote of a majority of the shares represented at the
meeting entitled to vote on the subject matter shall be necessary for share
holder action, unless the vote of a greater number is required by law.
Section 10. Organization. The President or Vice President shall call
meetings of shareholders to order and act as Chairman of such meeting. In the
absence of the Secretary and Assistant Secretary of the corporation, any person
appointed by the Chairman shall act as Secretary of such meeting. Section 11.
Voting. At every meeting of shareholders each shareholder having the right to
vote shall be entitled to vote in person or by proxy executed in writing by such
shareholder or by his duly authorized attorney-in-fact; provided, however, that
no such proxy shall be valid after eleven (11) months from the date of its
execution, unless such proxy expressly provides for a longer period. In all
elections of directors there shall not be cumulative voting.
ARTICLE IV
Directors
Section 1. Number of Directors. The Board of Directors shall consist of not
less than three persons, who need not be either shareholders or residents of the
State of Colorado, and who shall be elected at the annual meeting of
shareholders, or any adjournment thereof, and shall hold office for one year or
until their successors shall be duly elected and qualified.
Section 2. Increase
or Decrease in Number of Directors. The number of directors may be increased or
decreased from time to time by amendment to the By-Laws, but no decrease shall
have the effect of shortening the term of any incumbent director.
Section 3. Vacancies. Any vacancy occurring in the Board of Directors may
be filled by the affirmative vote of a majority of the remaining directors,
though less than a quorum of the Board of Directors. A director elected to fill
a vacancy shall be elected for the unexpired term of his predecessor in office.
Any Directorship to be filled by reason of an increase in the number of
directors, shall be filled by the affirmative vote of a majority of the
directors then in office, or by an election at an annual meeting, or at a
special meeting of shareholders called for that purpose. A director chosen to
fill a position resulting from an increase in the number of directors shall hold
office until the next annual meeting of shareholders.
Section 4. Removals. At any meeting of the shareholders called expressly
for that purpose, the entire Board of Directors, or any lesser number, may be
removed, with or without cause, by vote of the holders of the majority of the
shares entitled to vote at an election of directors' provided, however, that in
the case of cumulative voting, if less than the entire Board of Directors is to
be removed, no one of the directors may be removed if the votes of a sufficient
number of shares are cast against his removal which, if then cumulatively voted
at an election of the entire Board of Directors, or at an election of the class
of directors of which he is a part, would be sufficient to elect him.
Section 5. Resignations. Any director may resign at any time by mailing or
delivering or by transmitting by telegraph or cable written notice of his
resignation to the President or the Secretary of the corporation. Any such
resignation shall be effective at the time specified therein, or if not stated
in such resignation, the effective date shall be the date said resignation is
received.
Section 6. Powers. Subject to limitations of the Articles of Incorporation,
of the By-Laws, and of the laws of the State of Colorado as to action which
shall be authorized or approved by the shareholders, all corporate powers shall
be exercised by or under the authority of, and the business affairs of the
corporation shall be controlled by, the Board of Directors. Without prejudice,
to such general powers, but subject to the same limitations, it is hereby
expressly declared that the directors shall have the following powers,
to-wit:
(a) To select and remove all the officers, agents, and employees of the
corporation, prescribe such powers and duties for them as may not be
inconsistent with law, with the Articles of Incorporation, or the
By-Laws, and fix their compensation.
(b) To conduct, manage, and control the affairs and business of the
corporation, and to make such rules and regulations therefore not
inconsistent with law, or with the Articles of Incorporation, or the
By-Laws, as they may deem best.
(c) To change the principal office for the transaction of the business of
the corporation and to fix and locate, from time to time, one or more
subsidiary offices of the corporation within or without the State of
Colorado.
(d) To adopt, make, and use a corporate seal, and to prescribe to form of
certificates of stock, and to alter the form of such seal and of such
certificate, from time to time, as in their judgment they may deem
best, provided such seal and such certificate shall at all times
comply with the provisions of the law.
(e) To authorize the issuance of shares of stock of the corporation from
time to time upon such terms and for such considerations as may be
lawful.
(f) To borrow money and incur indebtedness for the purposes of the
corporation, and to cause to be executed and delivered therefor, in
the corporate name, promissory notes, bonds, debentures, deeds of
trust, mortgages, pledges, hypothecation's or other evidence of debt
and securities therefor.
(g) To declare dividends pursuant to the provisions of the laws of the
State of Colorado.
A majority of the Board of Directors may, by resolution, designate two or
more directors to constitute an executive committee, which, to the extent
provided in such resolution, shall and may exercise all of the authority of the
Board of Directors in the management of the corporation; provided, however, the
designation of such committee and the delegation thereto of authority shall not
operate to relieve the Board of Directors, or any member thereof of any
responsibility imposed upon it or him by law.
Section 7. Annual Meeting. A meeting of each newly elected Board of
Directors may be held without notice in each year immediately following the
annual meeting of shareholders.
Section 8. Regular Meeting. Regular meetings of the Board of Directors may
be held without notice at such time and place which, from time to time, may be
determined by the Board of Directors.
Section 9. Special Meeting. Special meetings of the Board of Directors may
be called at any time and at any place within or without the State of Colorado.
Section 10. Quorum. At all meetings of the Board of Directors, a quorum
shall consist of a majority of the members, and the majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors. In the absence of a quorum at any such meeting, a majority of the
directors present may adjourn the meeting from time to time without further
notice until a quorum shall be present
Section 11. Fees and Compensation. Directors shall not receive any stated
salary for the services as directors, but, by resolution of the Board of
Directors, a fixed fee, with or without expenses of attendance, may be allowed
one or more of the directors for attendance at each meeting. Nothing herein
contained shall be construed to preclude any director from serving the
corporation in any other capacity as an officer, agent, employee, or otherwise,
and receiving compensation therefor.
Section 12. Chairman of the Board. The Board of Directors may elect one of
their number to fill the office of the Chairman of the Board of Directors. In
the event the President of the corporation is also on the Board of Directors and
no Chairman of the Board of Directors is elected, the President will act as ex
officio Chairman of the Board of Directors.
The Chairman of the Board of Directors, if such officer shall be chosen by
the Board of Directors, shall preside at all meetings of the Board of Directors
at which he is present. He shall, subject to the direction of the Board of
Directors, have general oversight over the affairs of the corporation and shall,
from time to time, consult and advise with the President in the direction and
management of the corporation's business and affairs. He shall also do and
perform such other duties as may, from time to time, be assigned to him by the
Board of Directors.
ARTICLE V
Officers
Section 1. Officers. The officers of the corporation shall be a President,
a Secretary and a Treasurer. The corporation may also have, at the discretion of
the Board of Directors, one or more Vice Presidents, one or more Executive Vice
Presidents, one or more Assistant Secretaries, and one or more Assistant
Treasurers, and such other officers and/or agents as may be appointed and as the
business or the corporation may require. Any two or more offices may be held by
the same person, except the offices of President and Secretary.
Section 2. Election. The Board of Directors at its first meeting after each
annual meeting of shareholders, shall choose the officers, and may, not
inconsistent with the By-Laws, fix the powers and duties of any officer. Each
officer so chosen shall hold office until his successor shall be chosen and
shall qualify, unless he shall sooner resign or be removed as herein in these
By-Laws provided.
Section 3. Salaries. The salaries of the President, each Vice President,
the Secretary, and the Treasurer shall be fixed by the Board of Directors. The
salaries and wages of all other officers, agents, and employees of the
corporation shall be fixed in regular course by the active management of the
corporation subject to approval of the Board of Directors.
Section 4. Removals, Resignations, and Vacancies. Any officers or agents
may be removed, with or without cause, at any time by the Board of Directors
then in office.
Any officer may resign at any time by giving written notice to the Board of
Directors or to the President, or to the Secretary of the corporation. Any such
resignation shall take effect at the date of the receipt of such notice by the
Board of Directors, the President, or the Secretary of the corporation, unless a
later time is specified in such notice of resignation; and, unless otherwise
specified in such notice, the acceptance of such resignation shall not be
necessary to make it effective.
A vacancy in any office because of death, resignation, removal,
disqualification, or any other cause shall be filled in the manner prescribed in
the By-Laws for regular appointments to such office.
Section 5. President. Subject to such supervisory powers, if any, as may be
given by the Board of Directors to the Chairman of the Board, if there be such
an officer, the President shall be the chief executive officer of the
corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction, and control of the business and officers of the
corporation. He shall have the general powers and duties as may be prescribed by
the Board of Directors or these By-Laws.
Section 6. Vice Presidents. In the absence or disability of the Presidents,
the Vice Presidents, or Executive Vice Presidents, in order of their rank as
fixed by the Board of Directors, or if not ranked, the Vice President or
Executive Vice President designated by the Board of Directors, shall perform all
the duties of the President, and when so acting shall have all the powers of,
and be subject to all the restrictions upon the President. The Vice Presidents
and Executive Vice Presidents shall have such other powers and perform such
other duties as, from time to time, may be prescribed for them respectively by
the Board of Directors or these By-Laws.
In the event no individual or individuals have been designated as Vice
President, or Executive Vice President, the Secretary or the Treasurer, in that
order, shall, in the absence or disability of the President, perform all the
duties of the President, and when so acting shall have all the powers of, and be
subject to all the restrictions upon the President.
Section 7. Secretary. The Secretary shall attend all sessions of the Board
of Directors and all meetings of the shareholders and record all votes and the
minutes of all proceedings in a book to be kept for that purpose, and shall
perform like duties for the standing committees when required. He shall keep, or
cause to be kept, a stock register showing the names of the shareholders, number
and date of certificates issued, and the number and date of cancellation of
every certificate surrendered for cancellation. He shall give, or cause to be
given, notice of all meetings of the shareholders and meetings of the Board of
Directors as required. He shall perform such other duties as may be prescribed
by the Board of Directors.
Section 8. Treasurer. The Treasurer shall keep and maintain, or cause to be
kept and maintained, adequate and correct accounting records affecting the
cooperation. The books of account shall at all reasonable times be open to
inspection by any director.
The Treasurer shall deposit all monies and other valuables in the name and
to the credit of the corporation with such depositories as may be designated by
the Board of Directors. He shall disburse the funds of the corporation as may be
ordered by the Board of Directors, shall render to the President and directors,
whenever they request it, an account of all of his transactions as Treasurer,
and of the financial condition of the corporation. He shall have such other
powers and perform such other duties as may be prescribed by the Board of
Directors of these By-Laws.
If required by the Board of Directors, the Treasurer shall give the
corporation a bond in such sum with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the corporation, in case of his
death, resignation, retirement, or removal from office, of all books, papers,
vouchers, money, and other property of whatsoever kind in his possession or
under his control belonging to the corporation.
Section 9. Assistants. Any assistant officer shall, in the order of their
seniority, unless otherwise designated by the Board of Directors, and in the
absence or disability of the officer to whom they are an assistant, perform the
duties of such officer, and when so acting they shall have all the powers of,
and be subject to all the restrictions upon such officer. They shall have such
other powers, and perform such other duties as, from time to time, may be
prescribed for them respectively by the Board of Directors, the officers of the
corporation, or these By-Laws.
AMENDED AND RESTATED ARTICLES OF INCORPORATION OF
TELEGEN CORPORATION
Jessica Stevens and Bonnie Crystal certify that:
1. They are the President and Secretary, respectively, of Telegen
Corporation, a California corporation.
2. The articles of incorporation of this corporation are hereby amended and
restated to read as follows:
"I.
The name of the Corporation is Telegen Corporation.
II.
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than die banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
III.
A. This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the corporation is authorized to issue is twelve million
(12,000,000) shares, ten million (10,000,000) shares of which shall be Common
Stock and two million (2,000,000) shares of which shall be Preferred Stock.
B. Five hundred fifty thousand (550,000) of the authorized shares of Series
A Preferred Stock are hereby designated "Series A Preferred Stock."
C. The rights, preferences, privileges, restrictions and other matters
relating to the five hundred fifty thousand (550,000) shares of Series A
Preferred Stock are as follows:
1. Dividends. In each fiscal year of the Corporation, the holders of Series
A Preferred Stock shall be entitled to receive, out of funds legally available
therefor, when and if declared by the Board of Directors, before any cash
dividends shall be declared and paid upon or set aside for the Common Stock in
such fiscal year, a dividend at the rate of $0.80 per annum on each outstanding
share of Series A Preferred Stock (as adjusted for any stock split, stock
dividend, recapitalization or the like with respect to such shares). No
dividends (other than those payable solely in the Common Stock of the
Corporation) shall be declared or paid on any Common Stock of the Corporation
during any fiscal year of the Corporation until the full annual dividend on the
Series A Preferred Stock shall have been paid or declared and set apart. The
right to any dividends under this paragraph I shall not be cumulative, and no
right shall accrue to holders of Series A Preferred Stock by reason of the fact
that dividends on such shares are not declared or paid in any prior year.
Dividends, if paid, or if declared and set apart for payment, must be paid on,
or declared and set apart for payment on, all outstanding shares of Series A
Preferred Stock.
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the holders of Series A Preferred
Stock shall be entitled to receive, prior and in preference to any distribution
of any of the assets or surplus funds of the Corporation to the holders of the
Common Stock by reason of their ownership thereof, the amount equal to ten
dollars ($10.00) per share for each share of Series A Preferred Stock then held
by them (as adjusted for any combinations, consolidations, stock distributions
or stock dividends with respect to such shares) plus all declared but unpaid
dividends on their respective shares of Series A Preferred Stock then held by
them and no more (the "Series A Preferred Liquidation Preference"). If upon the
occurrence of such event, the assets and funds thus distributed among the
holders of the Series A Preferred Stock shall be insufficient to permit the
payment to such holders of the full aforesaid preferential amounts, then the
entire assets and funds of the Corporation legally available for distribution
shall be distributed ratably among the holders of the Series A Preferred Stock
in proportion to the shares then held by them.
(b) After payment to the holders of Series A Preferred Stock of the amounts
set forth in subparagraph (a) above, the entire remaining assets and funds of
the Corporation legally available for distribution, if any, shall be distributed
among the holders of the Common Stock, in proportion to the shares of Common
Stock then held by them.
(c) A consolidation or merger of the Corporation with or into any other
corporation or corporations, or a sale of all or substantially all of the assets
of the Corporation shall be deemed a liquidation, dissolution or winding up
within the meaning of this Section if more than fifty percent (50%) of the
surviving entity is not owned by persons who were holders of capital stock or
securities convertible into capital stock of the Corporation immediately prior
to such merger, consolidation or sale. In such event, the Series A Preferred
Liquidation Preference may be paid in cash or securities of any entity surviving
such liquidation event.
(d) As authorized by Section 402.5(c) of the California Corporations Code,
the provisions of Sections 502 and 503 of the California Corporations Code shall
not apply with respect to distributions made by the Corporation in connection
with the repurchase of shares of Common Stock issued to or held by employees,
directors or consultants of or to the Corporation or any of its subsidiaries
upon termination of their employment or services pursuant to agreements
providing for the right of such repurchase between the Corporation and such
persons.
(e) Notices of Record Date. In the event of any taking by the Corporation
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend) or other distribution, any security or right convertible
into or entitling the holder thereof to receive Additional Shares of Common
Stock, or any right to subscribe for, purchase or otherwise acquire any shares
of stock of any class or any other securities or property, or to receive any
other right, the Corporation shall mail to each holder of Series A Preferred
Stock at least twenty (20) days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution, security or right, and the amount and character of
such dividend, distribution, security or right.
3. Voting Rights. Except as otherwise expressly provided herein or as
required by law, the holder of each share of the Series A Preferred Stock shall
be entitled to the number of votes equal to the number of shares of Common Stock
into which such share of Series A Preferred Stock could be converted and shall
have voting rights and powers equal to the voting rights and powers of the
Common Stock (except as otherwise expressly provided herein or as required by
law, voting together with the Common Stock as a single class) and shall be
entitled to notice of any shareholders' meeting in accordance with the Bylaws of
the Corporation. Fractional votes shall not, however, be permitted and any
fractional voting rights resulting from the above formula (after aggregating all
shares into which shares of Series A Preferred Stock held by each holder could
be converted) shall be rounded to the nearest whole number (with one-half being
rounded upward).
4. Conversion. The holders of the Series A Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert.
(i) Optional Conversion. Each share of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at the office of the
Corporation or any transfer agent for the Series A Preferred Stock, into Common
Stock. The number of shares of Common Stock into which one share of Series A
Preferred will be converted will be equal to $10.00 (the "Series A Original
Purchase Price") divided by the Series A Conversion Price (as hereinafter
defined) then in effect, such conversion ratio being referred to as the "Series
A Conversion Rate." The initial Series A Conversion Price will be the Series A
Original Purchase Price and will be subject to adjustment as provided herein.
Upon any decrease or increase of the Series A Conversion Price or the Series A
Conversion Rate as described in this Section C.4, the Series A Conversion Rate
or Series A Conversion Price, as the case may be, will be increased or decreased
appropriately.
(ii) Automatic Conversion of Series A Preferred Stock. Each share of Series
A Preferred Stock will be converted into shares of Common Stock at the then
effective Series A Conversion Rate immediately upon the closing of the sale of
stock pursuant to a registration statement under the Securities Act of 1933, as
amended, for a bona fide, firm commitment underwritten public offering (other
than a registration on Form S-8, Form S-4 or comparable forms) of the
Corporation's Common Stock that has a public offering price of not less than
$15.00 per share (as adjusted for any Recapitalization Events).
(iii) Fractional Shares Upon Conversion. No fractional shares of Common
Stock will be issued upon conversion of Series A Preferred Stock, and any
fractional share that otherwise would result from conversion by a holder of all
of such holder's shares of Series A Preferred Stock (in the aggregate) will be
redeemed by payment in an amount equal to such fraction of the then effective
Series A Conversion Price as promptly as funds legally are available therefor.
(b) Mechanics of Conversion. Any holder of Series A Preferred Stock wishing
to convert shares of Series A Preferred Stock into Common Stock pursuant to
Section C.4(a)(i) shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or any transfer agent for the Series
A Preferred Stock and will give the Corporation written notice stating the name
or names in which the holder wishes the certificate or certificates for shares
of Common Stock to be issued. Any conversion pursuant to Section C.4(a)(i) shall
be deemed to be effective for all purposes upon receipt by the-Corporation or a
transfer agent for the Series A Preferred Stock of such certificates, duly
endorsed, and such written notice and shall be deemed to have been made
immediately prior to the close of business on the date thereof. As soon as
practicable after the effectiveness of any conversion of Series A Preferred
Stock and receipt by the Corporation or the appropriate transfer agent of
certificates representing such Series A Preferred Stock, duly endorsed, together
with written notice stating the name or names in which the holder wishes the
certificate or certificates for shares of Common Stock to be issued, the
Corporation shall cause to be issued and delivered pursuant to the written
instructions of the holder of the converted Series A P - referred Stock
certificates representing the Common Stock into which such Series A Preferred
Stock has been converted; provided, however, that the Corporation shall not be
required to issue certificates for Common Stock in any name other than that of
the holder in the absence of assurances reasonably satisfactory to the
Corporation that all stamp and other transfer taxes relating to the transfer of
such securities have been or will be paid. Notwithstanding any issuance or lack
thereof of certificates representing Common Stock, from and after the
effectiveness of any conversion of Series A Preferred Stock, the person or
persons entitled to receive the, shares of Common Stock issuable upon conversion
shall be treated by the Corporation for all purposes as the record holders of
the Common Stock obtainable upon such conversion and shall cease to have any
other rights of holders of Series A Preferred Stock.
(c) Adjustment for Subdivisions or Combinations of Common Stock. In the
event the Corporation at any time or from time to time effects a subdivision or
combination of its outstanding Common Stock into a greater or lesser number of
shares without a proportionate and corresponding subdivision or combination of
Series A Preferred Stock, then the existing Series A Conversion Price will be
decreased or increased proportionately.
(d) Adjustment for Dividends, Distributions and Common Stock Equivalents.
In the event the Corporation at any time or from time to time makes or issues,
or fixes a record date for the determination of holders of Common Stock (but not
holders of Series A Preferred Stock) entitled to receive, a dividend or other
distribution payable in additional shares of Common Stock or other securities or
rights (hereinafter referred to as "Common Stock Equivalents") convertible into
or entitling the holder thereof to receive additional shares of Common Stock
without payment of any consideration by such holder for such Common Stock
Equivalents or the additional shares of Common Stock, then and in each such
event the maximum number of shares (as set forth in the instrument relating
thereto without regard to any provisions contained therein for a subsequent
adjustment of such number) of Common Stock issuable in payment of such dividend
or distribution or upon conversion or exercise of such Common Stock Equivalents
will be deemed to be issued and outstanding as of the time of such issuance or,
in the event such a record date has been fixed, as of the close of business on
such record date. In each such event, the then existing Series A Conversion Rate
will be increased as of the time of such issuance or, in the event such a record
date has been fixed, as of the close of business on such record date, by
multiplying the then effective Series A Conversion Rate by a fraction,
(i) the numerator of which will be the total number of shares of Common
Stock issued and outstanding immediately prior-to the time of such issuance on
the close of business on such record date plus the number of shares of Common
Stock issuable in payment of such dividend or distribution or upon conversion or
exercise of such Common Stock Equivalents, and
(ii) the denominator of which will be the total number of shares of Common
Stock issued and outstanding immediately prior to the time of such issuance or
the close of business on such record date; provided, however, that if such
record date has been fixed and such dividend is not fully paid or if such
distribution is not fully made on the date fixed therefor, the Series A
Conversion Rate will be recomputed accordingly as of the close of business on
such record date and thereafter the Series A Conversion Rate will be adjusted
pursuant to this Section C.4(d) as of the time of actual payment of such
dividends or distribution.
(e) Adjustment for Sale of Additional Stock. If at any time the Corporation
issues or sells any Additional Stock (as defined below) without consideration or
at a price per share less than the Series A Conversion Price in effect
immediately prior to the issuance of such Additional Stock, then and in each
such case, the Series A Conversion Price in effect immediately prior to such
issuance shall automatically (except as otherwise provided below) be reduced,
concurrently with such issue, to a price determined by multiplying such Series A
Conversion Price by a fraction, the numerator of which shall be the number of
shares of Series A Preferred Stock outstanding immediately prior to such issue
plus the number of shares of Series A Preferred Stock which the aggregate
consideration received by the Corporation for the total number of shares of
Additional Stock so issued would purchase at such Conversion Price; and the
denominator of which shall be the number of shares of Series A Preferred Stock
outstanding immediately prior to such issue plus the number of such shares of
Additional Stock so issued.
(i) No adjustment of the Series A Conversion Price shall be made in an
amount less than one cent per share, provided that any adjustment that is not
required to be made by reason of this Section C(4)(e)(i) shall be carried
forward and taken into account in any subsequent adjustment.
(ii) Except to the limited extent provided for in Sections
C.4(e)(iii)(D)(3) and C.4(e)(iii)(D)(4), no adjustment of the Series A
Conversion Price shall have the effect of increasing the Series A Conversion
Price above the Series A Conversion Price in effect immediately prior to such
adjustment.
(iii) For the purpose of making any adjustment in the Series A Conversion
Price as provided above, the consideration received by the Corporation for any
issue or sale of Additional Stock will be computed as follows:
(A) To the extent it consists of cash, the amount of cash received by the
Corporation before deduction of any offering expenses payable by the Corporation
and any reasonable underwriting or similar commissions, compensation, or
concessions paid or allowed by the Corporation in connection with such issue or
sale.
(B) To the extent it consists of consideration in whole or in part other
than cash, the consideration other than cash shall be deemed to be at the fair
market value of that property as determined in good faith by the Corporation's
Board of Directors.
(C) If Additional Stock is issued or sold together with other stock or
securities or other assets of the Corporation for a consideration which covers
both, as the portion of the consideration so received that may be reasonably
determined in good faith by the Board of Directors to be allocable to such
Additional Stock.
(D) In the case of the issuance of options to purchase or rights to
subscribe for Common Stock, securities by their terms convertible into or
exchangeable for Common Stock or options to purchase or rights to subscribe for
such convertible or exchangeable securities (where the shares of Common Stock
issuable upon exercise of such options or rights or upon conversion or exchange
of such securities are not excluded from the definition of Additional Stock),
the following provisions shall apply:
(1) the aggregate maximum number of shares of Common Stock deliverable upon
exercise of such options to purchase or rights to subscribe for Common Stock
shall be deemed to have been issued at the time such options or rights were
issued and for a consideration equal to the consideration (determined in the
manner provided in Sections C.4(e)(iii)(A)-(C), if any, received by the
Corporation upon the issuance of such options or rights plus the minimum
purchase price provided in such options or rights for the Common Stock covered
thereby;
(2) the aggregate maximum number of shares of Common Stock deliverable upon
conversion of or in exchange for any such convertible or exchangeable securities
or upon the exercise of options to purchase or rights to subscribe for such
convertible or exchangeable securities and subsequent conversion or exchange
thereof shall be deemed to have been issued at the time such securities were
issued or such options or rights were issued and for a consideration equal to
the consideration, if any, received by the Corporation for any such securities
and related options or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the minimum additional consideration, if
any, to be received by the Corporation upon the conversion or exchange of such
securities or the exercise of any related options or rights (the consideration
in each case to be determined in the manner provided in Sections
C.4(e)(iii)(A)(C);
(3) in the event of any change in the number of shares of Common Stock
deliverable upon exercise of such options or rights or upon conversion of or in
exchange for such convertible or exchangeable securities, including, but not
limited to, a change resulting from the antidilution provisions thereof, the
Series A Conversion Price in effect at the time shall forthwith be readjusted to
such Series A Conversion Price as would have been obtained had the adjustment
that was made upon the issuance of such options, rights or securities not
converted prior to such change or the options or rights related to such
securities not converted prior to such change been made upon the basis of such
change, but no further adjustment shall be made for the actual issuance of
Common Stock upon the exercise of any such options or rights or the conversion
or exchange of such securities; and
(4) upon the expiration of any such options or rights, the termination of
any such rights to convert or exchange or the expiration of any options or
rights related to such convertible or exchangeable securities, the Series A
Conversion Price shall forthwith be readjusted to such Series A Conversion Price
as would have been obtained had the adjustment which was made upon the issuance
of such options, rights or securities or options or rights related to such
securities been made upon the basis of the issuance of only the number of shares
of Common Stock actually issued upon the exercise of such options or rights,
upon the conversion or exchange of such securities or upon the exercise of the
options or rights related to such securities.
(E) "Additional Stock" shall mean any shares of Common Stock issued (or
deemed to have been issued pursuant to Section C.4(e)(iii)(D) by this
Corporation after the date of filing of these Articles of Incorporation (the
"Effective Date"), other than:
(1) Common Stock issued to effect any stock split or stock dividend by the
Corporation.
(2) Common Stock issued or issuable to employees, directors or consultants
of this Corporation for the purpose of incentive or under any stock option,
stock purchase or similar plan which is approved by a majority of the Board.
(3) Common Stock issued or issuable upon conversion of shares of Series A
Preferred Stock.
(4) Common Stock issued in connection with the acquisition of another
corporation.
(f) No Impairment. The Corporation, whether by amendment of its Certificate
of Incorporation or through any reorganization, transfer of assets, merger,
dissolution, issue or sale of securities or any other voluntary action, will not
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Corporation, but at all times in good
faith will assist in the carrying out of all of such action as may be necessary
or appropriate in order to protect the conversion rights pursuant to this
Section C.4 of the holders of Series A Preferred Stock against impairment.
(g) Certificate as to Adjustments. Upon the occurrence of each adjustment
or readjustment of the Series A Conversion Rate pursuant to this Section C.4,
the Corporation at its expense will compute such adjustment or readjustment in
accordance with the terms hereof and prepare and promptly furnish to each holder
of Series A Preferred Stock a certificate setting forth (i) such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based, (ii) the Series A Conversion Rate at the time in effect
and (iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of Series A
Preferred Stock held by such holder.
(h) Notices of Record Date. In the event of any taking by the Corporation
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend) or other distribution, any Common Stock Equivalents or any
right to subscribe for or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, the Corporation
will deliver to each holder of Series A Preferred Stock at least ten (10) days
prior to the date specified therein, a notice specifying the date on which any
such record is to be taken for the purpose of such dividend, distribution or
rights, and the amount and character of such dividend, distribution or right.
(i) Reservation of Stock Issuable Upon Conversion. The Corporation at all
times will reserve and keep available out of its authorized but unissued shares
of Common Stock solely for the purpose of effecting the conversion of the shares
of Series A Preferred Stock such number of its shares of Common Stock as from
time to time will be sufficient to effect the conversion of all then outstanding
shares of Series A Preferred Stock; and if at any time the number of authorized
but unissued shares of Common Stock is not sufficient to effect the conversion
of all then outstanding shares of Series A Preferred Stock, in addition to such
other remedies as may be available to the holders of Series A Preferred Stock
for such failure, the Corporation will take such corporate action as, in the
opinion of its counsel, may be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as will be sufficient for such
purpose.
(j) Notices. Any notices required by the provisions of this Section C.4 to
be given to the holders of shares of Series A Preferred Stock must be in writing
and will be deemed given when delivered at the address of the recipient;
provided, however, that such address shall have been furnished in writing to the
person giving notice and the address shall be at an entity that maintains
regular business hours (except for holidays) throughout the entire year. In the
event that the address furnished is not at an entity that maintains regular
business hours, notice shall be deemed given upon the earlier of personal
delivery or, if sent by registered or certified mail, at the earlier of its
receipt or seventy-two (72) hours after deposit in a regularly maintained
receptacle for the deposit of the United States mail, addressed and mailed as
aforesaid.
5. Amendment. Any term relating to the Series A Preferred Stock may be
amended only with the vote or written consent of holders of not less am
sixty-seven percent (67%) of all Series A Preferred Stock then outstanding. Any
amendment so effected shall be binding upon the Corporation and any holder of
Series A Preferred Stock.
IV.
(a) The liability of the directors of the Corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
(b) The Corporation is authorized to indemnity the directors and officers
of the Corporation to the fullest extent permissible under California law.
(c) Any repeal or modification of this Article shall only be prospective
and shall not affect the rights under this Article in effect at the time of the
alleged occurrence of any action or omission to act giving rise to liability."
3. The foregoing amendment and restatement of the articles of incorporation
has been duly approved by the Board of Directors of this Corporation.
4. The foregoing amendment and restatement of the articles of incorporation
has been duly approved by the required vote of shareholders in accordance with
Section 902 of the Corporations Code. The total number of outstanding shares of
the Corporation is 2,594,058 shares of Common Stock. The number of shares voting
in favor of the amendment equaled or exceeded the vote required. The percentage
vote required was more than fifty percent (50%) of the outstanding shares of
Common Stock.
We further declare under penalty of perjury that the matters set forth in
the foregoing certificate are true and correct of our own knowledge.
Executed at Palo Alto, California, on September 2, 1994.
Jessica Stevens, President
Bonnie Crystal, Secretary
BYLAWS
OF
TELEGEN CORPORATION
SECTION I
Offices
1.1 Principal Executive Office. The Board of Directors shall designate the
location of the first principal executive office and may change the principal
executive office from one location to another within the State of California.
1.2 Other Offices. Branch or subordinate offices may at any time be
established by the Board of Directors at any place or places where the
Corporation is qualified to do business.
SECTION II
Meetings of Shareholders
2.1 Place of Meetings. All annual meetings of shareholders and all other
meetings of shareholders shall be held either at the principal executive office
or at any other place within or without the State of California which may be
designated either by the Board of Directors or by the written consent of all
shareholders entitled to vote at the meeting, given either before or after the
meeting and filed with the Secretary of the Corporation.
2.2 Annual Meetings. An annual meeting of shareholder shall be held on the
1st day of May in each year at the hour of 10:00 a.m. to elect Directors and to
transact any other proper business. If the day provided herein should fall upon
a Saturday, Sunday or legal holiday, then the annual meeting shall be held at
the same time and place on the next succeeding business day which is not a legal
holiday. If an annual meeting is not held as provided herein, the Directors may
be elected at any meeting of the shareholders thereafter called in the manner
provided herein.
2.3 Special Meetings. Special meetings of the shareholders, for any purpose
or purposes whatsoever, may be called at any time by the Board, the Chairperson
of the Board, the President, or by one or more of the shareholders entitled to
cast, in the aggregate, not less than 10% of the votes at the meeting.
To call a special meeting, the person(s) entitled to call such meeting
shall submit a request for such meeting in writing to the Chairperson of the
Board, the President, the Vice President, or Secretary of the Corporation, and
such officer shall, within 20 days of receipt of such request, cause notice to
be given to all shareholders entitled to vote thereat that a meeting will be
held at the time requested by the person or persons calling the meeting. This
request shall be given not less than 35 nor more than 60 days prior to the date
of the special meeting being called.
2.4 Notice of Annual and Special Meetings. Written notice of any annual or
special meetings of shareholders shall be given not than 10 nor more than 60
days before the date of the meeting to each shareholder entitled to vote at such
meeting. Such notice shall state the place, date and hour of the meeting and (1)
in the case of a special meeting, the general nature of the business to be
transacted and no other business may be transacted, or (2) in the case of the
annual meeting, those matters which the Board, at the time of the mailing of the
notice, intends to present for action by the shareholders. Notice of any meeting
at which directors are to be elected shall include the names of nominees
intended at the time of the notice to be presented by management for election.
Any shareholder approval at the meeting, other than unanimous approval by those
entitled to vote, shall be valid only if the general nature of the proposal so
approved was stated in the notice of meeting or in any written waiver of notice.
Such notice shall be given either personally or by first class mail or
other means of written communication, addressed to the shareholder at the
address of such shareholder appearing on the books of the Corporation or given
by the shareholder to the Corporation for the purpose of notice; or if no such
address appears or is given, at the place where the principal executive office
of the Corporation is located or by publication at least once in a newspaper of
general circulation in the county in which the principal executive office is
located. The notice shall be deemed to have been given at the time when
delivered personally or deposited in the mail or sent by other means of written
communication.
If a notice addressed to a shareholder at the address of the shareholder
appearing on the books of the Corporation is returned to the Corporation by the
United States Postal Service, marked to indicate that the United States Postal
Service is unable to deliver the notice to the shareholder at such address, all
future notices shall be deemed to have been duly given without further mailing
if the same shall be available for the shareholder upon written demand at the
principal executive office of the Corporation for a period of one year from the
date of the giving of the notice to all other shareholders.
2.5 Adjourned Meetings and Notice Thereof. When any shareholders' meeting
is adjourned to another time or place, notice of the adjourned meeting need not
be given if the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting, the Corporation may transact any
business which it might have transacted at the original meeting. If adjournment
is for more than 45 days or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each shareholder of record entitled to vote at the meeting.
2.6 Voting. Except as otherwise provided in the Articles of Incorporation
and except for cumulative voting as is provided for in paragraph 2.7 below, each
outstanding share, regardless of class, is entitled to one vote on each matter
submitted to a vote of shareholders and any shareholder may vote part of his
shares in favor of a proposal and refrain from voting his remaining shares or
vote them against the proposal. Such vote may be viva voce or by ballot;
provided, however, that all elections for Directors must be by ballot upon
demand made by any share holder before the voting begins.
2.7 Cumulative Voting. Every shareholder entitled to vote at any election
for Directors may cumulate his votes and give one candidate a number of votes
equal to the number of Directors to be elected multiplied by the number of votes
to which his shares are normally entitled, or to distribute his votes on the
same principle among as many candidates as he thinks fit, provided that no
shareholder shall be entitled to cumulate votes unless such candidate or
candidates' names have been placed in nomination prior to the voting and at
least one shareholder has given notice at the meeting prior to the voting of his
intention to cumulate his votes. The candidates receiving the highest number of
votes of shares entitled to vote for them up to the number of Directors to be
elected shall be elected.
2.8 Quorum. A majority of the shares entitled to vote, represented in
person or by proxy, shall constitute a quorum at a meeting of the shareholders.
Shares shall not be counted to constitute a quorum if voting of them has been
enjoined or they cannot lawfully be voted at the meeting. The shareholders
present at a duly called or held meeting at which a quorum is present may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough shareholders so as to leave less than a quorum, if any action taken
(other than adjournment) is approved by at least a majority of the shares
required to constitute a quorum.
2.9 Consent of Absentees - Waiver of Notice. The transactions of any
meeting of shareholders, either annual or special, however called and noticed,
shall be as valid as though had at a meeting duly held after regular call and
notice, if a quorum be present either in person or by proxy, and if, either
before or after the meeting, each of the persons entitled to vote, not present
in person or by proxy, signs a written waiver of notice or a consent to the
holding of such meeting, or an approval of the minutes thereof. All such
waivers, consents or approvals shall be filed with the corporate records or made
a part of the minutes of the meeting.
Attendance of a person at a meeting shall constitute waiver of notice of
and presence at the meeting, except when the person objects, at the beginning of
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened, and except that attendance at a meeting is not a
waiver of any right to object to the consideration of matters required by law to
be included in the notice but not so included, if such objection is expressly
made at the meeting.
2.10 Action Without Meeting. Except as otherwise provided in the Articles
of Incorporation, any action which may be taken at any annual or special meeting
of the shareholders may be taken without a meeting and without prior notice, if
a consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding shares having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting where all
shares entitled to vote thereon were present and voted; provided that unless the
consents of all shareholders entitled to vote have been solicited in writing,
notice of any shareholder approval pursuant to Section 310, 317, 1201 or 2007 of
the California General Corporation Law without a meeting by less than unanimous
written consent shall be given each shareholder as provided in paragraph 2.4 at
least 10 days before consummation of the action authorized by such approval, and
prompt notice shall be given of the taking of any other corporate action
approved by shareholders without a meeting by less than unanimous written
consent; and provided, further, that Directors may not be elected by written
consent unless such consent is unanimous. Section 310 relates to interested
directors' transactions; Section 317 relates to indemnification of officers and
directors; Section 1201 relates to reorganizations; Section 2007 relates to
certain distributions to shareholders during liquidation.
2.11 Proxies. Every person entitled to vote shares may authorize another
person or persons to act by proxy with respect to such shares. Every proxy
continues in full force and effect until revoked by the person executing it
prior to the vote pursuant thereto, provided that no proxy shall be valid after
the expiration of 11 months from the date thereof unless otherwise provided in
the proxy. Revocation of a proxy may be effected by a writing delivered to the
Corporation stating that the proxy is revoked or by a subsequent proxy executed
by the person executing the prior proxy and presented to the meeting or, as to
any meeting by attendance at such meeting and voting in person by the person
executing the proxy. The dates contained and the forms of proxy presumptively
determine the order of execution regardless of the postmarked dates on the
envelopes in which they are mailed.
2.12 Procedures for Conduct of Meeting. The chairman of the meeting shall
establish the procedural rules to govern a meeting of shareholders and shall
have the power to make final and binding decisions on any procedural questions
raised at the meeting. In advance of any meeting of shareholders the Board may
appoint inspectors of election to act at the meeting and any adjournment
thereof. If inspectors of election are not so appointed, or if any persons so
appointed fail to appear or refuse to act, the chairman of any meeting of
shareholders may, and on the request of any shareholder or shareholder's proxy
shall, appoint inspectors of election (or persons to replace those who so fail
or refuse) at the meeting. The number of inspectors shall be either one or
three. If appointed at a meeting on the request of one or more shareholders or
proxies, the majority of shares represented in person or by proxy shall
determine whether one or three inspectors are to be appointed.
SECTION III
Directors
3.1 Powers. Subject to any limitations in the Articles of Incorporation,
these Bylaws, and the California General Corporation Law as to action required
to be approved by the shareholders, or by the outstanding shares, the business
and affairs of the Corporation shall be managed and all corporate powers shall
be exercised by or under the direction of the Board of Directors. The Board may
delegate the management of the day-to-day operation of the business of the
Corporation to a management company or other person provided that the business
and affairs of the Corporation shall be managed and all corporate powers shall
be exercised under the ultimate direction of the Board.
3.2 Number of Directors. The authorized number of Directors shall be no
less than five (5) and no more than nine (9), with the precise number to be set
by a duly adopted resolution of the Board of Directors.
3.3 Election and Term of Office. The Directors shall be elected at each
annual meeting of shareholders to hold office until the next annual meeting, but
if any such annual meeting is not held, or the Directors are not elected
thereat, the Directors may be elected at any special meeting of shareholders
held for that purpose. Each Director, including a Director elected to fill a
vacancy, shall hold office until the expiration of the term for which elected
and until a successor is elected and qualified.
3.4 Vacancies. A vacancy or vacancies in the Board of Directors shall be
deemed to exist in case of the death, resignation or removal of any Director, or
if a vacancy is declared by the Board as provided in paragraph 3. 5 below, or if
the authorized number of Directors is increased. No reduction of the authorized
number of Directors shall have the effect of removing any Director prior to the
expiration of his term of office. Except for a vacancy created by the removal of
a Director, vacancies in the Board of Directors may be filled by majority of the
remaining directors, though less than a quorum, or by a sole remaining Director.
Vacancies created by the removal of a Director may be filled only by approval of
the shareholders. The shareholders may elect a Director at any time to fill any
vacancy not filled by the Directors. Any such election by written consent other
than to fill a vacancy created by removal requires the consent of. a majority of
the outstanding shares entitled to vote.
3.5 Removal. The Board of Directors may declare vacant the office of a
Director who has been declared of unsound mind by order of court or who has been
convicted of a felony. The entire Board of Directors or any individual Director
may be removed from office without cause if such removal is approved by the
outstanding shares; provided, however, that unless the entire Board is removed,
no individual Director may be removed when the votes cast against removal, or
not consenting in writing to such removal, would be sufficient to elect such
Director if voted cumulatively at an election at which the same total number of
votes cast were cast (or, if such removal is taken by written consent, all
shares entitled to vote were voted) and the entire number of Directors
authorized at the time of the Directors' most recent election were then being
elected.
3.6 Resignations. Any Director may resign effective upon giving written
notice to the Chairperson of the Board, the President, the Secretary or to the
entire Board of Directors, unless such notice specifies a later time for the
effectiveness of such resignation. If such resignation is effective at a future
time, a successor may be elected to take office when the resignation becomes
effective.
3.7 Place of Meeting. Meetings of the Board of Directors may be held at any
place within or without the State of California which has been designated in the
notice of the meeting, or if not stated in the notice, or if there is no notice,
designated herein or by resolution of the Board. In the absence of such
designation, regular meetings shall be held at the principal executive office.
3.8 Organization Meeting. Immediately following each annual meeting of
shareholders, the Board of Directors shall hold a regular meeting for the
purpose of organization, election of officers and the transaction of other
business. Notice of such meeting is hereby dispensed with.
3.9 Special Meetings. Special meetings of the Board for any purpose may be
called at any time by the Chairperson of the Board, the President or any Vice
President or the Secretary, or any two Directors. Notice of the time and place
of all special meetings of the Board of Directors shall be delivered personally
or by telephone or telegraph to each Director at least 48 hours prior to the
meeting or sent to each Director by first class mail, postage prepaid, at least
four days before the meeting. Notice of any meeting need not be given to any
Director who signs a waiver of notice, whether before or' after the meeting, or
who attends a meeting and does not object to the lack of notice either prior to
or at the commencement of that meeting.
3.10 Participation by Telephone. Members of the Board of Directors may
participate in a meeting through use of conference telephone or similar
communications equipment, so long as all members of the Board participating in
such meeting can hear one another.
3.11 Waiver of Notice. The transactions of any meeting of the Board of
Directors, however called and noticed or wherever held, shall be as valid as
though had at a meeting duly held after regular call and notice of a quorum be
present and if, either before or after the meeting, each of the Directors not
present signs a written waiver of notice, a consent to holding the meeting, or
an approval of the minutes thereof. All such waivers, consents or approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.
3.12 Quorum. A majority of the authorized number of Directors constitutes a
quorum of the Board for the transaction of business. Every act or decision done
or made by a majority of the Directors present at a meeting duly held at which a
quorum is present shall be regarded as the act of the Board of Directors, unless
a greater number be required by these Bylaws, by the California General
Corporation Law or by the Articles of Incorporation. A meeting at which a quorum
is initially present may continue to transact business notwithstanding the
withdrawal of Directors, if any action taken is approved by at least a majority
of the required quorum for such meeting. A majority of the Directors present,
whether or not a quorum is present, may adjourn any meeting to another time and
place. If a meeting is adjourned for more than 24 hours, notice of any
adjournment to another time or place shall be given prior to the time of the
adjourned meeting to the Directors who were not present at the time of the
adjournment.
3.13 Action Without Meeting. Any action required or permitted to be taken
by the Board of Directors may be taken without a meeting, if all members of the
Board shall individually or collectively consent in writing to such action. Such
written consent or consents shall be filed with the minutes of the proceedings
of the Board. Such action by written consent shall have the same force and
effect as a unanimous vote of such Directors.
3.14 Fees and Compensation. Directors shall not receive any stated salary
for their services as Directors, but, by resolution of the Board, a fixed fee,
with or without expenses of attendance, may be allowed the Directors for
attendance at each meeting. Nothing herein contained shall be construed to
preclude any Director from serving the Corporation in any other capacity as an
officer, agent, employee or otherwise and receiving compensation therefor.
3.15 Committees. The Board of Directors may, by resolution adopted by a
majority of the authorized number of Directors, designate one or more
committees, each consisting of two or more directors, to serve at the pleasure
of the Board of Directors. The Board of Directors may designate one or more
Directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. The appointment of members or alternate
members of a committee requires the vote of a majority of the authorized number
of Directors. Any such committee, to the extent provided in the resolution of
the Board of Directors, shall have all the authority of the Board of Directors
in the management of the business and the affairs of the Corporation except with
respect to (a) the approval of any action also requiring shareholders' approval
or approval of the outstanding shares, (b) the filling of vacancies on the Board
of Directors or any committee, (c) the fixing of compensation of Directors for
serving on the Board of Directors which by its express terms is not so amendable
or repealable, (d) a distribution to shareholders, except at a rate or in a
periodic amount or within a price range determined by the Board, or (e) the
appointment of other committees of the Board of Directors or the members
thereof.
3.16 Right of Inspection. Every Director shall have the absolute right to
inspect and copy at any reasonable time all books, records, documents of every
kind, and to inspect the physical properties of the Corporation and of its
subsidiaries, domestic or foreign. Such inspection by a Director may be made in
person or by agent or attorney, and the right of inspection includes the right
to copy and make extracts.
3.17 Standard of Care. Directors shall perform the duties of a Director
including duties as a member of any committee of the Board on which the Director
may serve, in good faith, in a manner which Director believes to be in 'the best
interests of the Corporation and with such care, including reasonable inquiry,
as an ordinarily prudent person in a like position would use under similar
circumstances. SECTION IV
Officers
4.1 Officers. The officers of the Corporation shall be a Chairperson of the
Board, or a President, or a Chief Executive Officer, or all of the foregoing, a
Secretary and a Chief Financial Officer. The Corporation may also have, at the
discretion of the Board of Directors, such other officers as may be appointed in
accordance with the provisions of paragraph 4.3. Any number of offices may be
held by the same person.
4.2 Subordinate Officers, Etc. The Board of Directors may appoint such
other officers with such titles and duties as are provided in these Bylaws or as
the Board of Directors may from time to time specify.
4.3 Removal and Resignation. Any officer may be removed at any time, with
or without cause, by a majority of the Directors at the time in office, at any
regular or special meeting of the Board. Any officer may resign at any time by
giving written notice of such resignation to the Corporation. The giving of such
resignation shall not operate to waive any rights the Corporation may have under
any employment agreements or understandings with such officers. Any such
resignation shall take effect at the date of the receipt of such notice or at
any later time specified therein; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
4.4 Vacancies. A vacancy in any office because of death, resignation,
removal, disqualification or any other cause shall be filled in the manner
prescribed in the Bylaws for regular appointment to such office.
4.5 Chairperson of the Board. The Chairperson of the Board shall, if
present, preside at all meetings of the Board of Directors, and exercise and
perform such other powers and duties as may be from time to time assigned to him
by the Board of Directors or prescribed by these Bylaws.
4.6 President. Subject to such supervisory powers, if any, as may be given
by the Board of Directors to the Chairperson of the Board, and if the
Corporation does not have a Chief Executive Officer, the President shall be the
chief executive officer of the Corporation and shall, subject to the control of
the Board of Directors, have general supervision, direction and control of the
business and affairs of the Corporation. She or he shall preside at all meetings
of the shareholders and, in the absence of the Chairperson of the Board, at all
meetings of the Board of Directors.
4.7 Vice President. In the absence or disability of the President, the Vice
Presidents, if any, in order of their rank as fixed by the Board of Directors,
or if not ranked, the Vice President designated by the Board of Directors, shall
perform all the duties of the President, and when so acting shall have all the
powers of, and be subject to all the restrictions upon, the President. The Vice
Presidents shall have such other powers and perform such other duties as from
time to time may be prescribed for them respectively by the Board of Directors
or these Bylaws.
4.8 Secretary. The Secretary shall record, or cause to be recorded, actions
taken at meetings of shareholders and Directors and committees in a book of
written minutes to be kept at the principal executive office and such other
places as the Board of Directors may order, with the time and place of holding,
whether regular or special, and, if special, how authorized, the notice thereof
given, the names of those present at Directors' and committee meetings, the
number of shares present or represented at shareholders' meetings and the
proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal executive
office or at the office of the Corporation's transfer agent, a record of its
shareholders, giving the names and addresses of shareholders, the number and
class of shares held by each, and the number and date of cancellation of every
certificate surrendered for cancellation. The aforementioned information may be
maintained either in written form or in any other form capable of being
converted into written form, including without limitation, punch cards, magnetic
tape or any other information storage device related to electronic data
processing equipment, provided that such card, tape or other equipment is
capable of reproducing the information in written form.
Unless another officer is designated by the Board of Directors or these
Bylaws, the Secretary shall give, or cause to be given, notice of all meetings
of the shareholders and of the Board of Directors required by these Bylaws or
the California General Corporation Law to be given, shall keep the Seal of the
Corporation in safe custody and shall have such other powers and perform such
other duties as may be prescribed by the Board of Directors or these Bylaws. If
for any reason the Secretary shall fail to give notice of any special meeting of
the Board of Directors called by one or more of the persons identified in
paragraph 3.9, or if she or he shall fail to give notice of any special meeting
of the shareholders called by one or more of the persons identified in paragraph
2.3, then any such person or persons may give notice of any such special
meeting.
If there is no Vice President, then in the absence or disability of the
President, the Secretary shall perform all the duties of the President and when
so acting shall have all the powers of, and be subject to all the restrictions
on, the President.
4.9 Chief Financial Officer. The Chief Financial Officer shall keep and
maintain, or cause to be kept and maintained, adequate and correct books and
records of account of the properties and business transactions of the
Corporation. The Chief Financial Officer shall deposit all moneys and other
valuables in the name and to the credit of the Corporation with such
depositories as may be designated by the Board of Directors. She or he shall
disburse the funds of the Corporation as may be ordered by the Board of
Directors, shall render to the Chairperson of the Board, the President and Board
of Directors, whenever any of them request it, an account of all financial
transactions of the Corporation and of the financial condition of the
Corporation and shall have such other powers and perform such other duties as
may be prescribed by the Board of Directors or these Bylaws.
SECTION V
Miscellaneous
5.1 Record Date and Closing Stock Books. The Board of Directors may fix, in
advance, a record date for the determination of the shareholders entitled to
notice of and to vote at any meeting of shareholders or entitled to receive any
dividend or distribution, or any allotment of rights or entitled to exercise any
rights in respect of any other lawful action. The record date so fixed shall be
not more than 60 days nor less than 10 days prior to the date of the meeting nor
more than 60 days prior to the event for the purposes of which it is fixed. When
a record date is so fixed, only shareholders of record on that date are entitled
to notice of and to vote at the meeting or to receive the dividend,
distribution, or allotment of rights, or to exercise any rights, as the case may
be, notwithstanding any transfer of any shares on the books of the Corporation
after the record date. If no record date is fixed, the record date for
determining shareholders entitled to notice of or to vote at a meeting of
shareholders shall be at the close of business on the business day next
preceding the day on which notice is given, or if notice is waived, at the close
of business on the business day next preceding the day on which the meeting is
held. The record date for determining shareholders entitled to give consent to
corporate action in writing without a meeting, when no prior action by the Board
is necessary, should be the day on which the first written consent is given. The
record date for determining shareholders for any other purpose shall be at the
close of business on the day on which the Board adopts the resolution relating
thereto, or the sixtieth day prior to the date of such action, whichever is
later.
5.2 Share Certificates. Every holder of shares in the Corporation shall be
entitled to have a certificate signed in the name of the Corporation by the
Chairperson of the Board, or vice Chairperson of the Board, or the President or
Vice President and by the Chief Financial Officer, or an Assistant Treasurer, or
the Secretary or any Assistant Secretary, certifying the number of shares and
the class or series of shares owned by the shareholder. Any or all of the
signatures on the certificate may be facsimile. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the corporation
with the same effect as if such person were an officer, transfer agent or
registrar at the date of issue. The foregoing notwithstanding, in the event that
the corporation is an issuer of securities registered under the Securities and
Exchange Act of 1934 or which is registered under the Investment Company Act of
1940, the Corporation may adopt a system of issuance, recordation and transfer
of its shares by electronic or other means not involving any issuance of
certificates, including provisions for notice to purchasers in substitution of
the statements required to be placed upon the certificates pursuant to Sections
417 and 418 of the California General Corporation Law, which system has been
approved by the Commissioner of Corporations or the Securities and Exchange
commission or which is authorized by any statute of the United States.
5.3 Inspection of Corporate Records. Any shareholder or shareholders
holding in the aggregate at least five percent (5%) of the outstanding voting
shares of the Corporation or who hold at least one percent (1%) of such voting
shares and have filed Schedule 14B with the Securities and Exchange Commission,
shall have an absolute right to do either or both of the following: (1) inspect
and copy the records of shareholders' names and addresses and shareholdings
during usual business hours upon five business days, prior written demand upon
the Corporation; or (2) obtain from the transfer agent for the Corporation upon
five (5) days' prior written demand and upon the tender of its usual charges for
such a list (the amount of which charges shall be stated to the shareholder by
the transfer agent upon request), a list of the shareholders' names and
addresses who are entitled to vote for the election of Directors, and their
shareholdings, as of the most recent record date for which it has been compiled
or as of the date specified by the shareholders subsequent to the date of
demand. The Corporation shall have the responsibility to cause its transfer
agent to comply with such demand. The record of shareholders shall also be open
to inspection and copying by any shareholder or holders of a voting trust
certificate at any time during usual business hours upon written demand on the
Corporation for a purpose reasonably related to such holders' interests as a
shareholder or holder of a voting trust certificate. The accounting books and
records and minutes of proceedings of the shareholders, the Board of Directors
and committees of the Board of Directors shall be open to inspection upon the
written demand on the Corporation of any shareholder or holder of a voting trust
certificate at any reasonable time during usual business hours for a purpose
reasonably related to such holder's interest as a shareholder or as a holder of
such voting trust certificate. This right of inspection shall extend to the
records of each subsidiary of the Corporation. The right of inspection includes
the right to copy and make extracts. Any inspection and copying under this
section may be made in person or by an agent or attorney.
5.4 Checks, Drafts, Etc. All checks, drafts or other orders for payment of
money, notes or other evidence of indebtedness, issued in the name of, or
payable to, the Corporation shall be signed or endorsed by such person or
persons and in such manner as, from time to time, shall be determined by
resolution of the Board of Directors.
5.5 Annual Report. So long as this Corporation has less than 100 holders of
record of its shares, in the manner determined by Section 605 of the California
General Corporation Law, the annual report to shareholders referred to in
Section 1501(a) of the California General Corporation Law is dispensed with. The
Board of Directors may cause annual or other periodic reports to be sent to the
shareholders in any form that it considers appropriate. 5.6 Contract, Etc., How
Executed. The Board of Directors, except as these Bylaws otherwise provide, may
authorize any officer or officer's agent or agents to enter into any contract or
execute any instrument in the name of and on behalf of the Corporation, and such
authority may be general or confined to specific instances; but, unless so
authorized by the Board of Directors, no officer, agent or employee shall have
any power or authority to bind the Corporation by any contract or engagement or
to pledge its credit or to render it liable for any purpose or in any amount.
5.7 Representation of Shares of Other Corporations. The Chairperson of the
Board, or the President or any Vice President, and the Secretary, or the
Assistant Secretary, of this Corporation are authorized to vote, represent and
exercise on behalf of this Corporation all rights incident to any and all shares
of any other corporation or corporations standing in the name of this
Corporation. The authority herein granted to said officers to vote or represent
on behalf of this Corporation any and all shares held by this Corporation in any
other corporation or corporations may be exercised either by such officers in
person or by any person authorized so to do by proxy or power of attorney duly
executed by said officers.
5.8 Accounting Period. The accounting period of the Corporation shall be
the twelve-month period beginning on January 1 of each year and ending on
December 31 of the same year.
5.9 Indemnification of Directors, Officers, Employees and Other Agents. (a)
Agents, Proceedings, and Expenses. For the purposes of this section, "agent"
means any person who is or was a director, officer, attorney, agent or employee
of this Corporation, or is or was serving at the request of this Corporation as
a director, officer, attorney, agent or employee of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise, or was a
director, officer, attorney, agent or employee of a domestic corporation which
was a predecessor corporation of this Corporation or of another enterprise at
the request of such. predecessor Corporation; "proceeding" means any threatened,
pending or completed action or proceeding, whether civil, criminal,
administrative, or investigative; and "expenses" includes, without limitation,
attorneys' fees and any expenses of establishing a right to indemnification
under (a) or (e) of this section.
(b) Actions Other than by the Corporation. This Corporation shall indemnify
any person who was or is a party, or is threatened to be made a party, to any
proceeding (other than an action by or in the right of this Corporation to
procure a judgment in its favor) by reason of the fact that such person is or
was an agent of this Corporation, against expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred in connection
with such proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in the best interests of this Corporation and,
in the case of a criminal proceeding, had no reasonable cause to believe the
conduct of such person was unlawful. The termination of any proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which the person reasonably believed to be
in the best interests of this Corporation or that the person had reasonable
cause to believe that the person's conduct was unlawful.
(c) Actions by or in the right of the Corporation. This Corporation shall
indemnify' any person who was or is a party, or is threatened to be made a
party, to any threatened, pending or completed action by or in the right of this
Corporation to procure a judgment in its favor by reason of the fact that such
person is or was an agent of this Corporation, against expenses actually and
reasonably incurred by such person in connection with the defense or settlement
of such action if such person acted in good faith, in a manner such person
believed to be in the best interests of this Corporation and its shareholders.
No indemnification shall be made under (c) of this section for any of the
following:
i. In respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to this Corporation in the performance of such
person's duty to the Corporation and its shareholders, unless and only to the
extent that the court in which such proceeding is or was pending shall determine
upon application that, in view of all the circumstances of the case, such person
is fairly and reasonably entitled to indemnity for the expenses which the court
shall determine; or
ii. Of amounts paid in settling or otherwise disposing of a pending action
without a court approval; or
iii. of expenses incurred in defending a pending action which is settled or
otherwise disposed of without court approval.
(d) Successful Defense by Agent. To the extent that any agent of this
Corporation has been successful on the merits in defense of any proceeding
referred to in (b) or (c) above or in defense of any claim, issue or matter
herein, the agent shall be indemnified against expenses actually and reasonably
incurred by the agent in connection therewith.
(e) Required Approval. Except as provided in (d) above, any indemnification
under this section shall be made by this Corporation only if authorized in the
specific case, upon a determination that indemnification of the agent is proper
in the circumstances because the agent has met the applicable standard of
conduct set forth in (b) or (c) above, by any of the following:
i. A majority vote of a quorum consisting of directors who are not parties
to such proceeding;
ii. If such a quorum of directors is not obtainable, by independent legal
counsel in written opinion;
iii. Approval of the shareholders, with the shares owned by the person to
be indemnified not being entitled to vote thereon. For the purposes of this
subsection, "approval of the shareholders" means approved or ratified by the
affirmative vote of a majority of the shares of this Corporation represented and
voting at a duly held meeting at which a quorum is present (which shares voting
affirmatively shall also constitute at least a majority of the required quorum)
or by the written consent signed by the holders of a majority of the outstanding
shares entitled to vote, which written consent shall be procedurally procured in
the manner provided by law; or
iv. The court in which the proceeding is or was pending upon application
made by this Corporation or the agent or the attorney or other person rendering
services in connection with the defense, whether or not such application by the
agent, attorney, or other person is opposed by this Corporation.
(f) Advance of Expenses. Expenses incurred in defending any proceeding
shall be advanced by this Corporation prior to the final disposition of the
proceedings on receipt of an undertaking by or on behalf of the agent to repay
the amount of the advance if it shall be determined ultimately that the agent is
not entitled to be indemnified as authorized in this section.
(g) Other Rights Authorized. The indemnification provided by this section
shall not be exclusive of any other rights to which those seeking
indemnification may be entitled under any by-law, agreement, vote of
shareholders, or vote of disinterested directors or otherwise, both as to action
in an official capacity and as to action in another capacity while holding such
office, to the extent such additional rights to indemnification are authorized
in the Articles of Incorporation of this Corporation. The right to indemnify
hereunder shall continued as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of the person. Nothing contained in this section
shall affect any right to indemnification to which any director, officer,
attorney, agent and employee of this Corporation or any subsidiary hereof may be
entitled by contract, written agreement or under these bylaws.
(h) Limitations. No indemnification or advance shall be made under this
section, except as provided in (d) or (e)(iii), in any circumstances where it
appears:
i. That it would be inconsistent with a provision of the articles or
bylaws, a resolution of the shareholders of an agreement in effect at the time
of the accrual of the alleged cause of action asserted in the proceeding in
which the expenses were incurred or other amounts were paid, which prohibits or
otherwise limits indemnification; or
ii. That it would be inconsistent with any condition expressly imposed by
the court in approval a settlement.
(i) Insurance. Upon and in the event of a determination by the Board of
Directors of this Corporation to purchase such insurance, this Corporation may
purchase and maintain insurance on behalf of any agent of the Corporation
against any liability asserted against or incurred by the agent in such capacity
or arising out of the agent's status as such whether or not this Corporation
would have the power to indemnify the agent against that liability under the
provisions of this section.
(j) Fiduciaries of Corporate Employee Benefit Plan. This section does not
apply to any proceeding against any trustee, investment manager or other
fiduciary of an employee benefit plan in that person's capacity as such, even
though that person may also be an agent of the Corporation as defined in (a) of
this section. Nothing contained in this section shall limit any right to
indemnification to which such a trustee, investment manager or other fiduciary
may be entitled by contract or otherwise, which shall be enforceable to the
extent permitted by applicable law.
(k) Authorization for Contract. The Board of Directors may authorize the
Corporation to enter into agreements, including any amendments or modifications
thereto, with any of its directors, officers or other persons described in (a)
of this section providing for indemnification of such persons to the maximum
extent permitted under applicable law or the Corporation's Articles of
Incorporation and Bylaws. SECTION VI
Amendments
6.1 Shareholders. New Bylaws may be adopted, or these Bylaws may be amended
or repealed, by the affirmative vote of a majority of the shares entitled to
vote represented at a meeting duly held at which a quorum is present or by the
written consent of shareholders as provided in paragraph 2.101 of these Bylaws.
6.2 Power of Directors. Subject to the right of shareholders as provided in
paragraph 6.1 of these Bylaws, Bylaws other than a bylaw or amendment thereof
changing the authorized number of Directors may be adopted, amended or repealed
by the Board of Directors.
<PAGE>
SOLAR ENERGY RESEARCH CORP.
REGISTRATION STATEMENT ON FORM S-4
Exhibit 21 - Subsidiaries of the Small Business Issuer
The subsidiaries of Solar Energy Research Corp., a Colorado corporation, are as
follows:
1. Telegen Acquisition Corporation, a Californai corporation
2. Solar Energy Research Corp. of California, a California corporation
The subsidiaries of Telegen Corporation, a California corporation, are as
follows:
1. Telegen Display Laboratories, Inc., a California corporation
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
Solar Energy Research Corp.
615 N. Main Street, Suite 678
Longmont, Colorado 80501
We hereby consent to the use and the inclusion of our report dated January
22, 1996, in this Form S-4 Registration Statement, and to the reference to us
under the heading "Experts" in such Prospectus.
Cordovano and Company, P.C.
Certified Public Accountants
Denver, Colorado
May 14, 1996
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the includion in this registration statement on Form S-4
(File No. 33____) of our report dated April 19, 1996, on our audits of the
financial statements of Telegen Corporation. We also consent to the reference to
our firm under the caption "Experts."
Coopers & Lybrand, L.L.P.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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