<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _____________________
Commission file number 0-21864
---------
TELEGEN CORPORATION
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(Exact name of registrant as specified in its charter)
California 84-0672714
- -------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Saginaw Drive, Redwood City, CA 94063
-----------------------------------------------
(Address of principal executive offices)
(415) 261-9400
-----------------------------------------------
(Registrant's telephone number, including area code)
Solar Energy Research Corp., a Colorado Corporation;
10075 E. County Line Road, Longmont, CO 80501
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year if changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------- -------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes _______ No _______
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. Approximately 4,872,000
-----------------------
common shares outstanding as of October 28, 1996
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This document is comprised of 46 pages
<PAGE>
INDEX
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Part I Financial Information
- ------ ---------------------
Item 1. Financial Statements
Consolidated, condensed balance sheets of Solar Energy Research Corp. a Colorado corporation
("SERC"), as of September 30, 1996 and December 31, 1995 (Unaudited)................................... 3
Consolidated, condensed statements of operations of SERC, three months ended September 30, 1996
and 1995 (Unaudited), nine months ended September 30, 1996 and 1995 (Unaudited), and
January 1, 1992 through September 30, 1996 (Unaudited)................................................. 4
Consolidated, condensed statements of cash flows of SERC, nine months ended September 30, 1996
and 1995 (Unaudited), and January 1, 1992 through September 30, 1996 (Unaudited)....................... 5
Notes to consolidated, condensed financial statements of SERC (Unaudited)............................... 6
Item 2. Management's Discussion and Analysis.................................................................... 9
Part II Other Information
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Item 4. Submission of Matters to a Vote of Security Holders..................................................... 10
Item 5. Other Information....................................................................................... 10
Item 5.1 Changes in Control of Registrant.............................................................. 11
Item 5.4 Changes in Registrant's Certifying Accountant................................................. 15
Item 5.7 Financial Statements and Exhibits............................................................. 15
(a) Financial Statements of business acquired..................................................... 15
Telegen Corporation Balance Sheets as of September 30, 1996 (Unaudited) and
December 31, 1995............................................................................. 16
Telegen Corporation Consolidated Unaudited Statements of Operations for the three
months ended September 30, 1996 and 1995...................................................... 17
Telegen Corporation Consolidated Unaudited Statements of Operations for the nine
months ended September 30, 1996 and 1995...................................................... 18
Telegen Corporation Consolidated Unaudited Statements of Cash Flows for the nine
months ending September 30, 1996 and 1995..................................................... 19
Telegen Corporation Consolidated Unaudited Notes to the Interim Financial
Statements.................................................................................... 20
Telegen Corporation, Report of Independent Accountants........................................ 21
Telegen Corporation Balance Sheets as of December 31, 1995 and 1994........................... 22
Telegen Corporation Statements of Operations for the years ended December 31, 1995
and 1994...................................................................................... 23
Telegen Corporation Statements of Cash Flows for the years ended December 31, 1995
and 1994...................................................................................... 24
Telegen Corporation Statements of Shareholders' Equity/(Deficit) for the years ended
December 31, 1995 and 1994.................................................................... 25
Telegen Corporation Notes to the December 31, 1995 and 1994 Financial Statements.............. 26
(b) Pro forma financial information............................................................... 38
Telegen Corporation Pro Forma Condensed Consolidated Balance Sheet, September 30,
1996 (Unaudited).............................................................................. 39
Telegen Corporation Pro Forma Condensed Consolidated Statement of Operations for the
nine month-period ended September 30, 1996 (Unaudited)........................................ 40
Telegen Corporation Pro Forma Condensed Balance Sheet, December 31, 1995 (Unaudited).......... 41
Telegen Corporation Pro Forma Condensed Statement of Operations for the year ended
December 31, 1995............................................................................. 42
Telegen Corporation Notes to the Pro Forma Condensed Consolidated Financial
Statements for the year ended December 31, 1995 (Unaudited) and the
nine-month period ended September 30, 1996 (Unaudited)........................................ 43
Item 5.8 Changes in Fiscal Year........................................................................ 45
Item 6. Exhibits and Reports on Form 8-K........................................................................ 45
Signatures................................................................................................................. 46
</TABLE>
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<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(Prior to October 28, 1996, the predecessor to Telegen Corporation)
Part I Financial Information
- ------ ---------------------
Item 1. Financial Statements
The financial statement presented in this section, Part I, Item 1, are for
Solar Energy Research Corp. and Subsidiary, the publicly reporting predecessor-
company to the Registrant. The Registrant changed its name to Telegen
Corporation on October 28, 1996, after the September 30, 1996 Registrant's
quarter end.
CONSOLIDATED, CONDENSED BALANCE SHEETS UNAUDITED
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash................................. $ 103 $ 12,509
Advance to merger candidate (Note G). -- 40,000
Organization costs................... 915 915
Deferred offering costs (Note F)..... -- 500
--------- ---------
$ 1,018 $ 53,924
========= =========
LIABILITIES
Accounts payable..................... 28,498 4,228
Other current liabilities............ 24,891 22,548
--------- ---------
Total liabilities.................. $ 53,389 $ 26,776
========= =========
SHAREHOLDERS' EQUITY (Note D)
Common stock......................... 713,798 636,925
Other shareholders' deficit.......... (766,169) (609,777)
Total shareholders' deficit........ (52,371) 27,148
--------- ---------
$ 1,018 $ 53,924
========= =========
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(Prior to October 28, 1996, the predecessor to Telegen Corporation)
CONSOLIDATED, CONDENSED STATEMENTS OF OPERATIONS UNAUDITED
<TABLE>
<CAPTION>
JANUARY 1,
1992
(INCEPTION)
THROUGH
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER
SEPTEMBER 30, SEPTEMBER 30, 30, 1996
------------------------ ----------------------- -----------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
COSTS AND EXPENSES
General and administrative,
related parties (Note B)............. $ 11,250 $ 7,369 $ 3,750 $ 2,913 $ 141,084
General and administrative............. 18,271 36,963 1,117 14,276 52,303
Cost of proposed acquisition........... 125,121 -- 61,908 -- 177,559
Interest expenses...................... 1,353 1,167 451 389 5,904
---------- ---------- ---------- ---------- ---------
155,995 45,499 67,226 17,578 376,850
NET LOSS............................... $ (155,995) $ (45,499) $ (67,226) $ (17,578) $(376,850)
---------- ---------- ---------- ---------- ---------
Weighted average shares outstanding*... 1,367,042 1,030,980 1,427,596 1,058,759 438,813
---------- ---------- ---------- ---------- ---------
Net Loss per share*.................... $ (.11) $ (.04) $ (.05) $ (.02) $ (.86)
---------- ---------- ---------- ---------- ---------
</TABLE>
* Does not reflect the 7.25 for 1 reverse stock split, described in Note E to
the Consolidated, Condensed Financial Statements of Solar Energy Research
Corp.
See accompanying notes to financial statements.
-4-
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(Prior to October 28, 1996, the predecessor to Telegen Corporation)
CONSOLIDATED, CONDENSED STATEMENTS OF CASH FLOWS UNAUDITED
<TABLE>
<CAPTION>
JANUARY 1,
1992
(Inception)
THROUGH
NINE MONTHS ENDED SEPTEMBER
SEPTEMBER 30, 30, 1996
------------------- -----------
1996 1995
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<S> <C> <C> <C>
Cash used in operating activities..................................... $(83,882) $(23,361) $ (166,373)
-------- -------- ----------
Cash flows form financing activities:
Contributed capital.................................................. 103 3,750 103
Offering costs incurred (Note F)..................................... (500) -- (500)
Sale of common stock (Note D)........................................ 71,873 28,044 166,873
-------- -------- ----------
Net cash provided by financing activities............................. 71,476 31,794 166,476
-------- -------- ----------
Net increase (decrease) in cash and cash equivalents.................. (12,406) 8,433 103
Cash and cash equivalents at beginning of period..................... 12,509 -- --
-------- -------- ----------
Cash and cash equivalents at end of period............................ $ 103 $ 8,433 $ 103
======== ======== ==========
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 judgment creditors in exchange for satisfaction of
judgment............................................................ $ -- $ -- $ 21,815
Shares issued for services........................................... $ 5,000 $ 4,456 $ 71,750
Shares issued for compensation:
President........................................................... $ -- $ 17,500 $ 102,750
Secretary........................................................... $ -- $ -- $ 1,500
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(Prior to October 28, 1996, the predecessor to Telegen Corporation)
NOTES TO CONSOLIDATED, CONDENSED FINANCIAL STATEMENTS UNAUDITED
as of
September 30, 1996
NOTE A: BASIS OF PRESENTATION
---------------------
The financial statements presented herein have been prepared by the Company in
accordance with the accounting policies in its Form 10-KSB report dated December
31, 1995 and should be read in conjunction with the notes thereto.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) which are necessary to a fair presentation of operating
results for the interim periods presented have been made.
Interim financial data presented herein are unaudited.
NOTE B: RELATED PARTY TRANSACTIONS
--------------------------
During the nine months ended September 30, 1996, the Company paid $9,000 to an
unconsolidated affiliate for management fees and expenses paid on behalf of the
Company. The Company owes the affiliate $2,500 as of September 30, 1996, which
is included in the accompanying financial statements in other current
liabilities.
NOTE C: INCOME TAXES
------------
At September 30, 1996, deferred taxes consisted of:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1996 1996
--------- ----------
<S> <C> <C>
Deferred tax asset, net operating loss carryforward... $ 562,842 $ 506,411
Valuation allowance................................... (562,842) (506,411)
--------- ---------
Net deferred taxes.................................... $ -- $ --
========= =========
</TABLE>
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.
-6-
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(Prior to October 28, 1996, the predecessor to Telegen Corporation)
NOTES TO CONSOLIDATED, CONDENSED FINANCIAL STATEMENTS, CONTINUED
as of
September 30, 1996
NOTE D: SHAREHOLDERS' EQUITY
--------------------
During the nine months ended September 30, 1996, the Company issued
128,746 shares of its $.50 par value common stock to accredited investors for
$64,373. The Company has utilized this cash together with cash from the
previous sales of its common stock to other accredited investors to pay certain
expenses in connection with the reverse acquisition of Telegen Corporation, an
operating California corporation. The Company also issued 10,000 shares of $.50
par value common stock as payment for legal services valued at $5,000.
Shareholders' equity transactions during the nine months ended September 30,
1996, consisted of the following:
<TABLE>
<CAPTION>
COMMON STOCK OTHER SHARE-
--------------------- HOLDERS'
SHARES* PAR VALUE EQUITY/DEFICIT
--------- --------- --------------
<S> <C> <C> <C>
Balance at December 31, 1995............................ 1,273,850 $636,925 $(609,777)
Shares issued for cash, January 23, 1996................ 10,000 5,000 --
Shares issued for cash February 13, 1996................ 20,000 10,000 --
Shares issued for services, April 3, 1996............... 10,000 5,000 --
Shares issued for cash, April 17, 1996.................. 10,000 5,000 --
Shares issued for cash, April 26, 1996.................. 58,746 29,373 --
Shares issued for cash, May 28, 1996.................... 22,500 11,250 --
Shares issued for cash, June 6, 1996.................... 22,500 11,250 --
Offering costs incurred................................. -- -- (500)
Capital contribution by officer......................... -- -- 103
Net loss for the nine months ended September 30, 1996... -- -- (155,995)
--------- -------- ---------
Balance at September 30, 1996........................... 1,427,596 $713,798 $(766,169)
========= ======== =========
</TABLE>
* Does not reflect the 7.25 for 1 reverse stock split, described in Note E to
the Consolidated, Condensed Financial Statements of Solar Energy Research
Corp.
NOTE E: SUBSEQUENT MERGER
-----------------
The Company, together with its merger candidate Telegen Corporation
("Telegen"), have executed a definitive agreement (the "Agreement") and
amendments whereby the Company will acquire Telegen in a reverse acquisition.
The agreement was approved by the Company's shareholders at a meeting on
September 27, 1996. Telegen was founded in 1990, and is engaged in the design,
development, manufacture (through contract manufacturers) and sales (through
manufacturers representatives and private label resellers), intelligent
telecommunications products which provide supplement features to existing
telephone equipment and services for customers and small businesses.
As part of the reorganization, the Company executed a 7.25 for 1
reverse split of its shares. The reverse split was approved by the Company's
shareholders at a meeting on September 27, 1996. The Company issued
approximately 4,674,229 (post-split) shares of common stock to acquire all of
the then outstanding shares of Telegen. In addition, the Company re-
incorporated in California and merged with Telegen Communications Corporation, a
California corporation (prior to October 28, 1996, named Telegen Corporation).
-7-
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(Prior to October 28, 1996, the predecessor to Telegen Corporation)
NOTES TO CONSOLIDATED, CONDENSED FINANCIAL STATEMENTS, CONTINUED
as of
September 30, 1996
NOTE F: PRIVATE OFFERING
----------------
During May 1996, the Company completed a private offering of its $.50
par value common stock in which it raised $171,873 for pre-acquisition costs
related to the proposed merger.
In connection with the offering of its common shares, the Company
incurred offering costs consisting of legal fees totalling $500. No commissions
were paid to underwriters. The Company offset the offering costs against
additional paid-in capital in the accompanying financial statements in other
shareholders' equity.
NOTE G: CONTINGENT ASSET
----------------
In an amendment to the Agreement, Telegen agreed to pay all
professional fees related to the acquisition after May 31, 1996. Telegen also
agreed to advance the Company $28,127 toward the $200,000 required to be raised
by the Company to cover legal and accounting pre-acquisition costs. Should
Telegen cancel the transaction, it is required to reimburse the Company for pre-
acquisition costs up to $171,873. As of September 30, 1996, the Company had
incurred pre-acquisition costs totalling $177,559 comprised of $40,000,
previously advanced to Telegen, less the $28,127 advance repaid by Telegen, plus
the cost-to-date of the merger, paid by the Company, totalling $140,771 and
accrued expenses totalling $24,915.
The Company received the $28,127 repayment from Telegen on July 26,
1996.
-8-
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(Prior to October 28, 1996, the predecessor to Telegen Corporation)
PART I. CONTINUED
- ------ ---------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
During the nine months ended September 30, 1996, the Company issued
128,746* shares of its $.50 par value common stock to accredited investors for
$64,373 cash and 10,000 shares for legal services valued at $5,000. In
addition, the Company paid for costs of a proposed merger. No other material
changes to the Company's financial condition occurred during the quarter to
which this Quarterly Report is filed.
The Company, together with its merger candidate Telegen Corporation
("Telegen"), have executed a definitive agreement whereby the Company will
acquire Telegen in a reverse acquisition. The agreement was approved by the
Company's shareholders at a meeting on September 27, 1996.
In an amendment to the agreement, Telegen agreed to pay all
professional fees, related to the acquisition, incurred after May 31, 1996.
Telegen also agreed to advance the Company $28,127 toward the $200,000 required
to be raised by the Company to cover legal and accounting pre-acquisition costs.
Should Telegen cancel the transaction, it is required to reimburse the Company
for pre-acquisition costs up to $171,873. As of June 30, 1996, the Company had
incurred pre-acquisition costs totalling $177,559 comprised of $40,000,
previously advanced to Telegen, less the $28,127 advance repaid by Telegen, plus
the costs-to-date of the merger, paid by the Company, totalling $140,771 and
accrued expenses totalling $24,915.
The Company received the $28,127 repayment from Telegen on July 26,
1996.
As part of the reorganization, the Company executed a 7.25 for 1
reverse split of its shares. The reverse split was approved by the Company's
shareholders at a meeting on September 27, 1996. The Company issued
approximately 4,674,229 (post-split) shares of common stock to acquire all of
the then outstanding shares of Telegen. In addition, the Company re-
incorporated in California and merged with Telegen Communications Corporation,
a California corporation (prior to October 28, 1996, named Telegen
Corporation).
The Company does not conduct any product research and development,
expect to purchase any significant equipment, or expect significant changes to
the number of employees as of September 30, 1996.
* Does not reflect the 7.25 for 1 reverse stock split, described in Note E to
the Consolidated, Condensed Financial Statements of Solar Energy Research
Corp.
PART II. OTHER INFORMATION
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-9-
<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(Prior to October 28, 1996, the predecessor to Telegen Corporation)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of shareholders was held on September 27, 1996 for
the purpose of considering and voting upon the following matters: (i) approval
of the Agreement and Plan of Reorganization as amended (the "Agreement"), by and
among the Registrant ("SERC", prior o October 28, 1996), Telegen Corporation, a
California corporation ("Telegen", prior to October 28, 1996), 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, is to 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 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, redomiciliation of the registrant, reverse stock split
and name change of the registrant as described above were approved by the
following vote:
<TABLE>
<CAPTION>
SHARES FOR SHARES AGAINST SHARES NOT VOTED
---------- -------------- ----------------
<S> <C> <C> <C>
833,210 -0- 594,386
</TABLE>
The following individuals, who are the six current directors of
Telegen, were elected to the board of directors of Solar Energy Research Corp.
of California (to be renamed Telegen Corporation after giving effect to the
redomiciliation of SERC as described above) to fill the vacancies resulting from
the resignations of James B. Weigand, Mark E.A. Weigand and Janet S. Collins in
connection with of the Acquisition by the following vote:
<TABLE>
<CAPTION>
SHARES FOR SHARES AGAINST SHARES NOT VOTED
---------- -------------- ----------------
<S> <C> <C> <C>
Jessica L. Stevens 833,210 -0- 594,386
Bonnie A. Crystal 833,210 -0- 594,386
Warren M. Dillard 833,210 -0- 594,386
Frederick T. Lezak, Jr. 833,210 -0- 594,386
James R. Iverson 833,210 -0- 594,386
Larry J. Wells 833,210 -0- 594,386
</TABLE>
ITEM 5. OTHER INFORMATION
The following information is presented in place of a report on
Form 8-K.
-10-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
ITEM 5.1 CHANGES IN CONTROL OF REGISTRANT
Prior to October 28, 1996, the Registrant (Telegen, then named Solar
Energy Research Corp., a Colorado corporation ("SERC")) owned all of the capital
stock of Solar Energy Research Corp. of California, a California corporation
("SERC California") and Telegen Acquisition Corporation, a California
corporation and wholly-owned subsidiary of SERC ("TAC"). SERC California and
TAC were organized by SERC for the purpose of effecting the acquisition (the
"Acquisition") by SERC of all of the outstanding capital stock of Telegen
Corporation, a California corporation ("Old Telegen") and legal predecessor to
Telegen Communications Corporation, a California corporation ("TCC"). On
October 28, 1996, the Acquisition was completed and occurred through (i) the
redomicilation of SERC as a California corporation through a merger of SERC with
and into SERC California, (ii) the amendment of the Articles of Incorporation of
Old Telegen to reflect the name change of Old Telegen to "Telegen Communications
Corporation", (iii) the amendment of the Articles of Incorporation of SERC
California to reflect the name change of SERC California to "Telegen
Corporation," and (iv) the merger of TAC with and into TCC with TCC becoming a
wholly-owned subsidiary of the Registrant ("Telegen").
The Acquisition of Old Telegen by SERC was made pursuant to the
Agreement and Plan of Reorganization, as amended (the "Agreement"), by and among
SERC, Old Telegen, and TAC, originally dated November 16, 1995. 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) acquired all of Old Telegen's outstanding capital stock through a
merger of TAC with and into Old Telegen with Old Telegen thereby becoming a
wholly-owned subsidiary of SERC California. The separate corporate existence of
TAC ceased and Old Telegen continued as TCC, the surviving corporation. In
connection with the Acquisition, all of the shares of Old Telegen common stock
were canceled, and all holders thereof automatically were entitled to receive
for each of their shares of Old Telegen common stock a share of Telegen common
stock (after giving effect to the 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).
Upon completion of the Acquisition, the principal shareholders of Old
Telegen became the principal shareholders of Telegen, and own approximately
95.8% (96.5% on a fully diluted basis) of the total issued and outstanding
common shares of Telegen immediately after the Acquisition. Upon completion of
the Acquisition, the principal shareholders of Old Telegen became the principal
shareholders of Telegen.
After giving effect to the Acquisition, Telegen's authorized capital
stock consists of 100,000,000 shares of no par value common stock and 10,000,000
shares of no par value preferred stock.
All outstanding shares of Telegen are fully paid and nonassessable.
All holders of Telegen common are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders, and shareholders have
the right to then cumulate their votes in the election of directors. Subject to
preferences that may be applicable to any outstanding shares of preferred stock,
holders of Telegen common are entitled to receive ratably such dividends as may
be declared by the Board of Directors out of funds legally available therefor.
Telegen 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.
Holders of Telegen common have no preemptive rights and no right to
convert their shares of Telegen common into other securities. There are no
redemption or sinking fund provisions applicable to the Telegen common. Upon
liquidation, dissolution or winding up of Telegen, the assets of Telegen, after
satisfaction of all liabilities and distributions to preferred shareholders, if
any, would be distributed pro rata to the holders of the common stock.
As of October 28, 1996, the Registrant is a diversified, high
technology company with products, both developed and in development, in the
telecommunications, flat panel display and internet hardware markets. At
present, Telegen is organized into four subsidiaries and divisions. Telegen
Display Laboratories, Inc. ("TDL"), a California corporation and subsidiary of
TCC, as defined below, has developed a low-cost flat panel display technology to
compete with other types of flat panel displays. The
-11-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
Telegen Communications Corporation ("TCC"), a California corporation and
subsidiary of Telegen develops, manufacturers and markets a line of intelligent
telecommunications products, providing additional features to existing telephone
equipment used by consumers and small businesses. TCC also has two divisions
developing other products. The internet products 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 a research organization which
develops new products and technologies, which are then manufactured and marketed
through one of the operating divisions or subsidiaries. Telegen's corporate
offices are located at 101 Saginaw Road, Redwood City, CA 94063, (415) 261-9400.
The following is the Registrant's management discussion and analysis
with respect to TCC's third quarter results of operation of 1996 as well as
Telegen's liquidity and capital resources.
RESULTS OF OPERATIONS
During the third quarter of 1996 TCC continued to expand its research
and development operations, especially in its flat panel subsidiary. No new
products were introduced and sales of existing products continued to be minimal.
Revenues. Product revenues for the third quarter of 1996 were $4,888
as compared with $31,663 for the third quarter of 1995. Product sales for the
third quarter of 1995 included one-time test market sales of ACS products. As
with the second half of 1995 and the first half of 1996, revenues continued to
lag due to delays in redesign of the company's Teleblocker product and minimal
sales of the company's ACS product line despite a signed contract with a major
long distance carrier under which that carrier is required to purchase $500,000
of the company's ACS product by April of 1997. The Company has had no revenue
from its flat panel display subsidiary and doesn't expect any revenue from it
until after the end of 1996.
Cost of Goods Sold. Cost of goods sold for the third quarter of 1996
were $3,200 as compared with $40,807 for the third quarter of 1995. Cost of
goods sold for the third quarter of 1995 included $30,000 for the test market
sales of ACS products.
Research & Development. Research and development costs for the third
quarter of 1996 were $696,731 compared with $155,446 for the third quarter of
1995. Research and development activities were significantly lower in the third
quarter of 1995 due to financial constraints and the completion of the ACS
product. In contrast to 1995, research and development costs significantly
increased in the third quarter of 1996 due in large part to the addition of the
flat panel display subsidiary in 1996 which accounted for $569,496 of research
and development costs for the third quarter of 1996 as compared with no such
research and development costs for the third quarter of 1995.
Sales & Marketing. Sales and marketing costs for the third quarter of
1996 were $91,552 compared with $5,877 for the third quarter of 1995. Reduced
expenses for sales and marketing for the third quarter of 1995 were the result
of reduced staffing due to financial constraints. Increased costs for 1996 were
the result of increased staffing, ramp up for the 1997 display trade show
season, and development of a new generation of marketing materials.
General & Administrative. General and administrative expenses were
$712,399 for the third quarter of 1996 as compared with $274,782 for the third
quarter of 1995. Increases in general and administrative expenses occurred in a
variety of areas in 1996 including increased staffing, increased rent and
related expenses due to the company's relocation from a 10,000 square foot
location in Foster City, California to a 30,000 square foot facility in Redwood
City, California increased travel expenses (primarily related to activities of
the flat panel subsidiary), and additional legal and accounting fees related to
TCC's merger with the Registrant.
Interest Income & Expense. Net interest income for the third quarter
of 1996 was $169,360 compared with net interest expense of $3,791 for the third
quarter of 1995. The net interest expense for the third quarter of 1995
consisted of interest on loans for which the company had no offsetting interest
bearing bank balances. The interest income for the third quarter of 1996
-12-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
is the result of the company's interest bearing bank balances combined with a
one time adjustment, a reduction of interest expense in the amount of $83,798,
reflecting a settlement with Bank Sadarat for $100,000 which was significantly
less than the combined principal and accrued interest that the company had
recorded on its books.
LIQUIDITY & CAPITAL RESOURCES
TCC has funded its operations primarily through private placements of
its equity securities with individual investors. Through September 30, 1996,
TCC has raised a total of $13,882,539 of net capital through the sale of common
stock and $937,856 of net capital through the sale of Series A preferred stock.
In an effort to conserve cash resources TCC has issued common stock
and stock equivalents in lieu of cash as payment for certain operating expenses,
primarily legal fees and employee services. During the third quarter of 1996
TCC issued 20,159 shares of common stock, and 4,000 shares of common stock, in
lieu of, cash as payment for legal and employee services valued at $110,995,
and, equipment valued at $60,000, respectively. Over $25,000 of the amount
issued for services represents the retirement of payables arising from services
rendered during prior periods.
In May of 1996, TCC formed TDL, a subsidiary for the development and
commercialization of High Gain Emissive Display ("HGED") technology. Shortly
after TDL's formation, IPC-Transtech Displays (Pte.) Ltd. ("IPC-Transtech"), a
Singapore-based joint venture company, acquired a 10% equity interest in TDL for
an investment in TDL of $5,000,000. Along with its investment in TDL, IPC-
Transtech acquired options to purchase licenses to build up to four flat panel
display production plants in exchange for aggregate fees of up to $40 million
plus royalties of 10% of the gross revenues from the sale of HGED displays by
IPC-Transtech. In connection with this transaction, TDL paid $400,000 in broker
fees.
A full scale production plant for the flat panel display is currently
estimated to cost $30 million for equipment, $30 million in plant and
infrastructure plus working capital of about $50 million, or a total of about
$100 million. Telegen does not have these funds available and will not be able
to build this plant without securing significant additional capital. Telegen
plans to acquire these funds either (1) from a large joint venture partner who
would be the co-owner of the plant or (2) through a future public offering of
stock, whether its own or that of TDL. Even if such funding can be obtained,
which cannot be assured, it is currently estimated that a full scale production
plant could not be completed and producing significant numbers of flat panel
displays before the end of 1997.
However, Telegen is currently contemplating entering into license
agreements with a number of large, well-capitalized enterprises to manufacture
displays. These manufacturers would also have the attributes of established
manufacturing expertise, distribution sources to assure a ready market for the
displays and established reputations. This approach could eliminate the
requirement for significant additional capital since these other, large
manufacturers would provide the capital required to get the displays into the
marketplace. Further, Telegen would expect to receive front-end license fees
plus ongoing royalties for income. However, Telegen does not currently expect
to have any such manufacturing license agreements in place before the end of
1996, or any significant production of displays thereunder before 1998.
Telegen has recently commenced building a limited production/prototype
line which is expected to have the capacity to manufacture marketable displays
sufficient to produce significant revenues and is expected to come on-line
before the end of 1997. The cost of that production line is estimated to be
approximately an additional $2,000,000.
Telegen's other future capital requirements will depend upon many
factors, including the timing of acceptance of Telegen's products in the market,
the progress of Telegen's research and development efforts, Telegen's operating
results and the status of competitive products. Telegen anticipates that its
existing capital resources and revenues from operations will be adequate to meet
Telegens forecasts through 1996. Thereafter, Telegen expects that further
development of its Telecom and Internet products will be funded from operating
income. As discussed above, Telegen's current commitments for capital
expenditures
-13-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
is related to the purchase of equipment which is required to establish a limited
production line for the flat panel display. TDL will require significant
additional capital at such time as it moves into large scale manufacturing.
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. However, Telegen believes that, unless it moves to large scale
manufacturing of its flat panel display product prior to the end of 1997, it
will have sufficient cash to fund its operations for at least the next twelve
months.
-14-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
ITEM 5.4 CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
Cordovano & Company, P.C., was replaced as the registrant's principal
accountant due to the merger of the registrant with Telegen Communications
Corporation, a California corporation (formerly named Telegen Corporation), on
October 28, 1996 (the "Merger"). Coopers & Lybrand, L.L.P., has been engaged as
the new independent accountant for the registrant as a result of the Merger, and
is rendering its opinion of the registrant with respect to the financial
statements of Telegen Communications Corporation for the years ended December
31, 1995 and 1994. Coopers & Lybrand, L.L.P. has audited the financial
statements of Telegen Communications Corporation for the past five fiscal years
of operation.
During the past two years Cordovano & Company, P.C.'s report on the
financial statements of the registrant for either of the past two years did not
contain an adverse opinion, disclaimer of opinion, or was qualified as to
uncertainty, audit scope, or accounting principles. During the registrant's two
most recent fiscal years and any subsequent interim period preceding such
dismissal there were no disagreements between the registrant and Cordovano &
Company, P.C. regarding any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
The decision to change accountants was approved by the board of
directors of the registrant on November 11, 1996 to become effective upon the
filing by the registrant of its 10-QSB for the period ending September 30, 1996.
ITEM 5.7 FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
The business acquired on October 28, 1996, is named Telegen
Communications Corporation, a California corporation ("TCC"), which prior to
October 28, 1996 was named Telegen Corporation, a California corporation. The
following is a list of the financial statement and notes available for TCC as of
September 30, 1996:
Telegen Corporation Consolidated Balance Sheets as of September 30,
1996 and December 31, 1995 (Unaudited)
Telegen Corporation Consolidated Statements of Operations for the
three months ended September 30, 1996 and 1995 (Unaudited)
Telegen Corporation Consolidated Statements of Operations for the nine
months ended September 30, 1996 and 1995 (Unaudited)
Telegen Corporation Consolidated Statements of Cash Flows for the nine
months ending September 30, 1996 and 1995 (Unaudited)
Telegen Corporation Notes to the Interim Financial Statements
(Unaudited)
Telegen Corporation Balance Sheets as of December 31, 1995 and 1994
Telegen Corporation Statements of Operations for the years ended
December 31, 1995 and 1994
Telegen Corporation Statements of Cash Flows for the years ended
December 31, 1995 and 1994
Telegen Corporation Statements of Shareholders' Equity/(Deficit) for
the years ended December 31, 1995 and 1994
Telegen Corporation Notes to the December 31, 1995 and 1994
Financial Statements
-15-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
as of September 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,035,707 $ 177,904
Accounts receivable, trade 6,402 3,704
Accounts receivable, other 120,933 2,186
Inventory 328,536 377,627
----------- -----------
Total current assets 6,491,578 561,421
Property and equipment, net 942,732 147,243
Deferred financing costs, net 197,248
Other assets 63,495 15,712
----------- -----------
$ 7,497,805 $ 921,624
=========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of notes payable $ 126,116 $ 654,816
Accounts payable, trade 271,970 1,147,953
Accounts payable, other - 2,102
Accrued expenses 357,767 518,732
----------- -----------
Total current liabilities 755,853 2,323,603
Notes payable shareholder, long-term portion - 167,649
----------- -----------
Total liabilities 755,853 2,491,252
----------- -----------
Shareholders' equity (deficit)
Series A Convertible preferred stock 937,856 922,526
Common stock 13,882,539 2,809,703
Accumulated deficit (8,078,443) (5,301,857)
----------- -----------
Total shareholders' equity (deficit) 6,741,952 (1,569,628)
----------- -----------
$ 7,497,805 $ 921,624
=========== ===========
</TABLE>
-16-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months ended September 30, 1996 and 1995 (Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Sales $ 4,888 $ 31,663
Cost of goods sold 3,200 40,807
----------- ---------
Gross profit (loss) 1,688 (9,144)
Operating expenses:
Selling and marketing 91,552 5,877
Research and development 696,731 155,446
General and administrative 712,399 274,782
----------- ---------
Loss from operations (1,498,994) (445,249)
Other income/(expense):
Interest income 89,076 4
Interest expense 80,284 (3,795)
----------- ---------
Net loss $(1,329,634) $(449,039)
=========== =========
</TABLE>
-17-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
CONSOLIDATED STATEMENTS OF OPERATIONS
for the nine months ended September 30, 1996 and 1995 (Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Sales $ 19,833 $ 137,898
Cost of goods sold 15,282 137,831
----------- ----------
Gross profit (loss) 4,551 67
Operating expenses:
Selling and marketing 96,800 67,965
Research and development 988,319 507,272
General and administrative 1,705,920 758,607
----------- -----------
Loss from operations (2,786,488) (1,333,777)
Other income/(expenses):
Interest income 144,684 330
Interest expense (134,782) (12,751)
----------- -----------
Net loss $(2,776,586) $(1,346,198)
=========== ===========
</TABLE>
-18-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ending September 30, 1996 and 1995 (Unaudited)
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,776,586) $(1,346,198)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation 72,253 44,088
Amortization 2,217 9,951
Amortization of deferred financing cost 197,248 -
Operating expenses paid with issuance of 271,493 185,594
common stock and common stock equivalents
Interest expense added to note payable 107,847 12,751
Changes in assets and liabilities:
Decrease (increase) in accounts receivable (121,445) 12,703
Decrease (increase) in inventory 49,091 (234,407)
Decrease (increase) in other assets (50,000) 21,483
Increase (decrease) in accounts payable (878,086) 295,112
Increase (decrease) in accrued expenses (160,965) 215,078
----------- -----------
Total adjustments (510,347) 562,354
----------- -----------
Net cash used in operating activities (3,286,933) (783,844)
----------- -----------
Cash flows used in investing activities:
Insurance proceeds on fixed assets 12,500
Purchase of fixed assets (867,742) -
Purchase of intangible assets - -
----------- -----------
Net cash provided by (used in) investing activities (867,742) 12,500
----------- -----------
Cash flows from financing activities:
Net proceeds from borrowings 232,423 100,366
Principal payments on notes payable (1,036,619) (14,775)
Issuance of common stock 10,801,343 55,805
Issuance of preferred stock, net of offering costs 15,330 624,243
----------- -----------
Net cash provided by financing activities 10,012,477 765,639
Net increase (decrease) in cash and cash equivalents 5,857,803 (5,705)
Cash and cash equivalents at beginning of period $ 177,904 $ 117,725
=========== ===========
Cash and cash equivalents at end of period $ 6,035,707 $ 112,020
=========== ===========
Supplemental disclosures:
Cash paid for interest $ 53,618 $ 98
=========== ===========
Cash paid for income taxes $ 800 $ 800
=========== ===========
</TABLE>
-19-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The unaudited interim period financial statements presented herein have been
prepared by Telegen Corporation (the "Company") in accordance with the
accounting policies used in the preparation of the financial statements for the
year ended December 31, 1995 and should be read in conjunction with the notes
thereto. In the opinion of the Company's management, all adjustments
(consisting only of normal recurring adjustments) which are necessary to a fair
presentation of the interim period financial statements have been made.
2. INVENTORY:
Inventory at September 30, 1996 was $328,536. This consisted of
approximately $151,300 in components, $44,600 of work in process and $132,600 of
finished goods.
3. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the three month period ended September 30, 1996 the Company issued
20,159 shares and 4,000 of common stock and during the three month period ended
September 30, 1995 the Company issued 20,596 shares of common stock,
respectively, in lieu of cash as payment in 1996 for legal fees and other
additional services valued at $110,995 and equipment valued at $60,000 and in
1995 for legal fees and other services valued at $102,976.
4. CONTINGENCIES:
The Company is subject to various legal actions and claims arising in the
ordinary course of business. The Company's management believes that the outcome
of these matters will not have a material adverse effect on the Company's
financial position, results of operations and cash flows.
5. COMMITMENTS:
In August 1996 the Company commenced renting its new facility in Redwood City.
The term of the lease is five years with minimum payments of $40,000 per month.
The accompanying notes are an integral part of these financial statements.
-20-
<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
-21-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
BALANCE SHEETS
as of December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
ASSETS
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
----------- ----------
Total Assets.................................................................. $ 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, $10liquidation preference, authorized
550,000 shares, 112,750 and 47,500 shares issued and outstanding at 1995
and 1994, respectively (Note 7).............................................. 922,526 350,704
Common stock, no par value; authorized 10 million shares, 2,717,927 and
2,621,642 shares issued and outstanding at 1995 and 1994, respectively..... 2,809,703 2,111,742
Accumulated deficit............................................................ (5,301,857) (2,783,931)
----------- ----------
Total shareholders' deficit................................................ (1,569,628) (321,485)
----------- ----------
$ 921,624 $ 566,952
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-22-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
STATEMENTS OF OPERATIONS
for the years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
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)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-23-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss..................................................................... $(2,517,926) $(1,943,712)
----------- ----------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation................................................................. 58,784 53,509
Amortization................................................................. 13,269 13,251
Amortization of deferred financing costs..................................... 22,529 --
Accretion of bridge loan discount............................................ 17,833 --
Allowance for doubtful accounts.............................................. 14,113 --
Provision for inventory write-downs.......................................... 19,381 --
Operating expenses paid with issuance of common stock and common 536,964 209,219
stock equivalents..........................................................
Interest expense added to note payable principal............................. 20,853 28,162
Changes in assets and liabilities:
Decrease (increase) in accounts receivable................................. 8,382 167,089
Decrease (increase) in prepaid expenses.................................... 28,044 (28,044)
(Increase) in inventory.................................................... (251,718) (130,885)
Decrease in other assets................................................... -- 5,497
Increase in trade and other accounts payable............................... 672,435 204,314
Increase in accrued expenses............................................... 323,275 147,999
----------- ----------
Total adjustments......................................................... 1,484,144 670,111
----------- ----------
Net cash used in operating activities..................................... (1,033,782) (1,273,601)
----------- ----------
Cash flows used in investing activities:
Insurance proceeds on fixed assets........................................... 12,500 --
Purchase of fixed assets..................................................... -- (117,125)
Purchase of intangible assets................................................ -- (1,120)
----------- ----------
Net cash provided by (used in) investing activities........................ 12,500 (118,245)
----------- ----------
Cash flows from financing activities:
Proceeds from borrowings..................................................... 457,640 19,311
Principal payments on notes payable.......................................... (26,203) --
Issuance of common stock..................................................... 163,165 142,320
Issuance of preferred stock, net of offering costs........................... 571,822 350,704
Bridge loan offering costs................................................... (84,963) --
----------- ----------
Net cash provided by financing activities.................................. 1,081,461 512,335
----------- ----------
Net increase (decrease) in cash and cash equivalents.......................... 60,179 (879,511)
Cash and cash equivalents at beginning of year................................ 117,725 997,236
----------- ----------
Cash and cash equivalents at end of year...................................... 177,904 117,725
=========== ==========
Supplemental disclosures: Cash paid for interest............................. $ 98 $ --
=========== ===========
Cash paid for income taxes................................................... $ 800 $ 800
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-24-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT)
for the years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
ACCUMULATED
PREFERRED STOCK COMMON STOCK DEFICIT TOTAL
---------------------- -------------------- ----------- --------
SHARES AMOUNT SHARES AMOUNT
-------- --------- -------- ---------
<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 -- 251,955
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.
-25-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
NOTES TO THE DECEMBER 31, 1995 AND 1994 FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business
------------------
Telegen Corporation (the Company) was incorporated in the state of
California on May 3, 1990. The Company designs, develops and manufactures
intelligent telecommunication, internet hardware, and flat panel display
products. Currently, the Company is only marketing its telecommunications
products. Subsequent to year-end the Company formed a subsidiary, Telegen
Display Laboratories to oversee the development of the Company's flat panel
products.
Cash and Cash Equivalents
-------------------------
Cash equivalents are defined as highly liquid investments which have
original maturities of three months or less from the date acquired.
Inventory
---------
Inventory of telephone accessory products and component parts is stated at
the lower of cost (weighted average method) or market value.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation of equipment is
provided using the straight-line method over the estimated useful lives of five
years. Amortization of leasehold improvements is provided on the straight-line
method over the shorter of the estimated useful life of the improvement or the
term of the lease. Furniture and equipment received in exchange for stock is
recorded at the stockholder's basis. Costs of maintenance and repairs are
expensed while major improvements are capitalized. Gains or losses from
disposals of property and equipment are reflected in current operations.
Deferred Financing Costs
------------------------
Deferred financing costs, which were incurred by the Company in connection
with the Bridge Financing (Note 6), are charged to operations as additional
interest expense over the life of the underlying debt using the interest method.
Other Assets
------------
Other assets consist of deposits, trademarks, patents and organization
costs. The trademarks, patents and organization costs are carried at cost and
are amortized on a straight-line basis over five years.
Revenue Recognition
-------------------
The Company recognizes revenues when products are shipped.
-26-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
NOTES TO THE DECEMBER 31, 1995 AND 1994 FINANCIAL STATEMENTS, CONTINUED
Income Taxes
------------
The Company reports income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, which requires the
liability method in accounting for income taxes. Deferred tax assets and
liabilities arise from the differences between the tax basis of an asset or
liability and its reported amount in the financial statements.
Deferred tax amounts are determined by using the tax rates expected to be
in effect when the taxes will actually be paid or refunds received, as provided
under currently enacted tax law. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense or credit is the tax payable or refundable, respectively, for
the period plus or minus the change during the period in deferred tax assets and
liabilities.
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.
Research and Development Costs
------------------------------
Expenditures relating to the development of new products and processes,
including significant improvements to existing products, are expensed as
incurred.
-27-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
NOTES TO THE DECEMBER 31, 1995 AND 1994 FINANCIAL STATEMENTS, CONTINUED
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:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Raw materials and supplies..... $360,046 $118,255
Finished goods - Teleblocker... 11,043 27,035
Finished goods - ACS........... 6,538 --
-------- --------
$377,627 $145,290
======== ========
</TABLE>
-28-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
NOTES TO THE DECEMBER 31, 1995 AND 1994 FINANCIAL STATEMENTS, CONTINUED
3. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and consist of the following at
December 31:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
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
========== =========
</TABLE>
4. OTHER ASSETS:
Other assets are stated at cost and consist of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
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
======== ========
</TABLE>
-29-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
NOTES TO THE DECEMBER 31, 1995 AND 1994 FINANCIAL STATEMENTS, CONTINUED
5. NOTES PAYABLE:
Notes payable consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
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
========= =========
</TABLE>
-30-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
NOTES TO THE DECEMBER 31, 1995 AND 1994 FINANCIAL STATEMENTS, CONTINUED
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.
-31-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
NOTES TO THE DECEMBER 31, 1995 AND 1994 FINANCIAL STATEMENTS, CONTINUED
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.
-32-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
NOTES TO THE DECEMBER 31, 1995 AND 1994 FINANCIAL STATEMENTS, CONTINUED
The following summarizes the stock option transactions for the two-year
period ended December 31, 1995:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE PER
SHARES SHARE
----------- -----------------
<S> <C> <C>
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
========
</TABLE>
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.
-33-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
NOTES TO THE DECEMBER 31, 1995 AND 1994 FINANCIAL STATEMENTS, CONTINUED
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:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
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)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
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.
-34-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
NOTES TO THE DECEMBER 31, 1995 AND 1994 FINANCIAL STATEMENTS, CONTINUED
Line of Credit
The carrying value of the Company's line of credit is assumed to
approximate fair values due to its short-term maturities.
Notes Payable
The fair value of the Company's notes payable is estimated by discounting
the future cash flows using rates currently available for debt of similar terms
and maturity. The carrying value of these instruments approximates fair value.
10. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the years ended December 31, 1995 and 1994, the Company received the
following services in exchange for shares of common stock:
<TABLE>
<CAPTION>
1995 1994
----------------- -----------------
SERVICES SHARES SERVICES SHARES
RECEIVED ISSUED RECEIVED ISSUED
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Legal Services............. $217,000 43,083 166,000 38,421
Employee Services.......... 7,900 1,582 37,000 7,342
Deferred Financing Costs... 49,500 9,899 -- --
Other Services............. 61,000 23,687 19,000 3,418
Accounts Payable........... 3,300 400 52,000 14,010
</TABLE>
In addition, approximately $252,000 in employee services was received in
exchange for 50,500 common stock warrants (Note 7). Also, approximately
$106,000 in deferred financing costs and $34,000 in common stock offering costs
are included in accounts payable at December 31, 1995.
In 1994, the Company received a vehicle in exchange for $5,000 in cash and
a note payable to the seller for $10,000.
-35-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
NOTES TO THE DECEMBER 31, 1995 AND 1994 FINANCIAL STATEMENTS, CONTINUED
11. PROPOSED MERGER:
The Company has entered into an agreement dated November 16, 1995, as
amended by Amendment No. 1, dated January 18, 1996, and Amendment No. 2, dated
April 9, 1996, whereby the Company would merge with a SEC registrant
(Registrant). Pursuant to the merger agreement, among other things, each share
of common and preferred stock of the Company would be converted into shares of
common stock and preferred stock of the Registrant (after giving effect to a
7.25:1 reverse split of the Registrant's common stock). The surviving company
would be known as Telegen Corporation and the directors of the Company
immediately prior to the merger will be the directors of the surviving company.
Additionally, certain key employees of the Company will enter into employment
contracts, effective upon the consummation of the merger. Among other
conditions, the proposed merger is subject to the approval of the majority of
the outstanding voting shares of the Registrant. Under certain circumstances,
if the agreement is terminated, the Company may be liable for up to $200,000 in
expenses incurred by the Registrant related to this transaction. Additional
shares may be issued to shareholders of the Registrant if certain post-merger
stock price parameters are not met over the period occurring between the merger
closing date and December 31, 1997.
12. COMMITMENTS:
The Company leases its facilities and certain equipment under long-term,
noncancelable lease agreements which have been accounted for as operating
leases. The leases require that the Company pay all property taxes, insurance
costs, repairs and common area maintenance expenses associated with its portion
of the facilities. The Company's noncancelable lease agreement expires during
1996. Minimum payments during 1996 under the lease terms are $97,698.
Rental expense charged to operations for all operating leases was
approximately $202,000 and $189,000 for the years ended December 31, 1995 and
1994, respectively.
Subsequent to December 31, 1995, the Company's Board of Directors approved
the future grant of a 5% interest in the Company's subsidiary, Telegen Display
Laboratories, to a director of the subsidiary.
In March 1996, the Company consummated an Agreement to sell a minimum of
$360,000 in products and services to a telecommunications company by March 1997.
Currently, all of the Company's telecommunication products are manufactured in
Hong Kong and The People's Republic of China by a single manufacturer. The
Company contracts with the manufacturer on a purchase order basis and does not
have a long-term agreement with the manufacturer. The Company is currently
pursuing additional assembly sources which meet the Company's quality
specifications. Nonetheless, the Company believes that it has adequate capacity
through its current manufacturer to meet its requirements through the next year.
13. CONTINGENCIES:
The Company is subject to various legal actions and claims arising in the
ordinary course of business. Management believes the outcome of these matters
will have no material adverse effect on the Company's financial position,
results of operations and cash flows.
14. RELATED PARTY TRANSACTIONS:
Revenues for the year ended December 31, 1995, includes approximately
$30,000 in sales to a business whose principal is a director of the Company.
-36-
<PAGE>
TELEGEN CORPORATION
(Renamed Telegen Communications Corporation as of October 28, 1996)
NOTES TO THE DECEMBER 31, 1995 AND 1994 FINANCIAL STATEMENTS, CONTINUED
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.
-37-
<PAGE>
TELEGEN CORPORATION
(The Registrant as of October 28, 1996, on a Pro Forma Condensed Basis)
(b) PRO FORMA FINANCIAL INFORMATION
The following is a list of the financial statements and notes available for
the Registrant as of September 30, 1996, on a pro-forma condensed basis, giving
effect to the October 28, 1996 Acquisition:
Pro Forma Consolidated Condensed Balance Sheet as of September 30, 1996
(Unaudited)
Pro Forma Consolidated Condensed Statement of Operations for the nine-month
period ended September 30, 1996 (Unaudited)
Pro Forma Condensed Balance Sheet as of December 31, 1995 (Unaudited)
Pro Forma Condensed Statement of Operations for the year ended December 31,
1995 (Unaudited)
Notes to the Pro Forma Consolidated Condensed Financial Statements for the
year ended December 31, 1995 and the nine-month period ended September 30,
1996 (Unaudited)
-38-
<PAGE>
TELEGEN CORPORATION
(The Registrant as of October 28, 1996, on a Pro Forma Condensed Basis)
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
HISTORICAL PROFORMA
---------------------------- ------------------------
SOLAR ENERGY
TELEGEN RESEARCH TELEGEN
CORPORATION CORPORATION ADJUSTMENTS CORPORATION
- ---------------------------------------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Current Assets
- --------------
Cash $ 6,035,707 $ 103 $ -- $ 6,035,810
Accounts receivable, trade 6,402 -- -- 6,402
Accounts receivable, other 120,933 -- -- 120,933
Inventory 328,536 -- -- 328,536
Prepaid & other current assets -- 915 -- 915
---------- ----------- ---------- ----------
Total current assets 6,491,578 1,018 -- 6,592,596
Property and equipment, net 942,732 -- -- 942,732
Other assets 63,495 -- -- 63,495
---------- ----------- ---------- ----------
Total assets 7,497,805 1,018 -- 7,498,823
========== =========== ========== ==========
Current Liabilities
- -------------------
Current maturities of notes payable 126,116 -- -- 126,116
Accounts payable, trade 271,970 28,498 -- 300,468
Accrued expenses 357,767 24,891 -- 382,658
---------- ----------- ---------- ----------
Total current liabilities 755,853 53,389 -- 809,242
Note payable-shareholder, long-term -- -- -- --
---------- ----------- ---------- ----------
Total liabilities 755,853 53,389 -- 809,242
Shareholders' equity (deficit)
- ------------------------------
Series A convertible preferred stock, 937,856 -- -- 937,856
Common stock 13,882,539 713,798 (766,169) B 13,830,168
Additional paid in capital -- 954,061 (954,061) B --
Accumulated deficit (8,078,443) (1,720,230) 1,720,230 B (8,078,443)
---------- ----------- ---------- ----------
Total shareholder's equity (deficit) 6,741,952 (52,371) -- 6,689,581
Total liabilities and shareholder's deficit 7,497,805 1,018 -- 7,498,823
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
-39-
<PAGE>
TELEGEN CORPORATION
(The Registrant as of October 28, 1996, on a Pro Forma Condensed Basis)
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
for the nine-month period ended September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
HISTORICAL PROFORMA
---------------------------- --------------------------
SOLAR ENERGY
TELEGEN RESEARCH TELEGEN
CORPORATION CORPORATION ADJUSTMENTS CORPORATION
- ------------------------------------------ ----------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Sales $ 19,833 $ -- $ -- $ 19,833
Cost of goods sold (15,282) -- -- (15,282)
------------ --------- -------- -----------
Gross profit 4,551 -- -- 4,551
Operating expenses
- ------------------
Selling and marketing 96,800 -- -- 96,800
Research and development 988,319 -- -- 988,319
General and administrative 1,579,855 29,521 (29,521) C 1,579,855
General and administrative-related party 126,065 125,121 (125,121) C 126,065
------------ --------- -------- -----------
Loss from operations (2,786,488) (154,642) 154,642 (2,786,488)
Other income/(expense)
- ---------------------
Interest income 144,684 -- -- 144,684
Interest expense (134,782) (1,353) -- (136,135)
------------ --------- -------- -----------
Net loss (2,776,586) (155,995) 154,642 (2,777,939)
============ ========= ======== ===========
Weighted average shares outstanding 4,183,054 1,367,042 4,371,612
============ ========= ==========
Net loss per common and common
equivalent share (0.66) (0.11) (0.64)
============ ========= ==========
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
-40-
<PAGE>
TELEGEN CORPORATION
(The Registrant as of October 28, 1996, on a Pro Forma Condensed Basis)
PRO FORMA CONDENSED BALANCE SHEET
December 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
HISTORICAL PROFORMA
---------------------------- --------------------------
SOLAR ENERGY
TELEGEN RESEARCH TELEGEN
CORPORATION CORPORATION ADJUSTMENTS CORPORATION
- ------------------------------------ ----------- ------------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Current Assets
- --------------
Cash $ 177,904 $ 12,509 $ $ 190,413
--
Accounts receivable, trade 3,704 -- -- 3,704
Accounts receivable, other 2,186 -- -- 2,186
Inventory 377,627 -- -- 377,627
Deferred merger costs -- 40,000 (40,000) A --
----------- ---------- ------------ -----------
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
=========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
-41-
<PAGE>
TELEGEN CORPORATION
(The Registrant as of October 28, 1996, on a Pro Forma Condensed Basis)
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
for the year ended December 31, 1995
<TABLE>
<CAPTION>
HISTORICAL PROFORMA
---------------------------- --------------------------
SOLAR ENERGY
TELEGEN RESEARCH TELEGEN
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 (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 (0.95) (0.08) (0.90)
equivalent share ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
-42-
<PAGE>
TELEGEN CORPORATION
(The Registrant as of October 28, 1996, on a Pro Forma Condensed Basis)
NOTES TO THE PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
for the year ended December 31, 1995
and the nine-month period ended September 30, 1996
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION:
The Registrant has filed an amended registration statement on Form S-4 with the
Securities and Exchange Commission under the name Solar Energy Research Corp., a
Colorado corporation ("SERC"), with respect to the acquisition (the
"Acquisitions") of all outstanding capital stock of Telegen Corporation, a
California corporation ("Telegen") by Telegen Acquisition Company, a California
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;
(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; and (iv)
will issue one warrant to acquire a share of SERC's common stock in exchange
for each outstanding warrant 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 have been prepared based on the historical financial
statements of Telegen considering the effects of the Acquisition. The pro forma
balance sheet of Telegen Corporation at September 30, 1996 has been prepared as
if the acquisition and the reorganization transactions had been consummated at
September 30, 1996. The pro forma income statements of Telegen Corporation for
the year ended December 31, 1995 and the nine-month period ended September 30,
1996 have been prepared as if the acquisition and the reorganization
transactions had been consummated at January 1, 1995 and January 1, 1996. 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 September 30, 1996 and excludes the anti-
dilutive effect of the contingent shares issuable upon the exercise of stock
options, warrants and other contingent shares related to the price protection
provisions. For the year ended December 31, 1995 and the period ended September
30, 1996, the pro forma fully diluted loss per common share is considered to be
the same as the pro forma primary loss per common share since the effect of the
common stock equivalents and any contingent shares associated with the price
protection provision would be anti-dilutive.
The unaudited pro forma financial statements are not necessarily indicative of
what the actual financial position would have been at September 30, 1996, nor of
the actual results of operations for the year ended December 31, 1995 or the
nine-month period ended September 30, 1996, had the acquisition and the
reorganization transactions occurred on September 30, 1996, January 1, 1995 and
January 1, 1996, respectively, nor does it purport to present the future
financial position or results of operations of the Registrant.
2. ASSUMPTIONS:
Certain assumptions regarding the operations of the Registrant have been made in
connection with the preparation of the pro forma financial statements. Those
assumptions are as follows:
(a) Pro forma net income per share information for the year ended December 31,
1995 is calculated using weighted average shares outstanding of 147,686
shares for SERC (after giving effect to the 7.25 to 1 reverse split of the SERC
outstanding common stock) prior to the merger plus the weighted average shares
outstanding of 2,652,718 shares for Telegen.
-43-
<PAGE>
TELEGEN CORPORATION
(The Registrant as of October 28, 1996, on a Pro Forma Condensed Basis)
NOTES TO THE PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED
for the year ended December 31, 1995
and the nine-month period ended September 30, 1996
(Unaudited)
(b) Pro forma net income per share information for the nine-month period ended
September 30, 1996 is calculated using weighted average shares outstanding of
188,558 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 4,183,054 shares for Telegen.
(c) The Registrant anticipates that the reorganization will qualify as a tax
free reorganization under Section 368(a)(1)(B) of the Internal Revenue Code.
SERC anticipates limitation of the use of its tax net operating loss
carryforwards as a result of a change in ownership as defined in Section 382 of
the Internal Revenue Code. SERC and Telegen can utilize their existing net
operating loss carryforwards, subject to the limitation on SERC set out above,
on future taxable income generated by their respective companies.
The Registrant will provide a full valuation allowance against its deferred tax
asset due to the uncertainty of the its realization. The deferred tax asset is
primarily attributable to approximately $3.2 million in net operating loss
carryforwards expiring from 1998 through 2010.
3. THE PRO FORMA ADJUSTMENTS:
(A) Elimination of the deferred merger costs as part of the purchase
price of Telegen.
(B) Elimination of SERC common stock, additional paid-in capital and
stockholders' deficit. The elimination of SERC common stock is offset by the
SERC's net assets (pre-acquisition) of $27,148 and ($52,371) at December 31,
1995, and September 30, 1996, respectively, and the elimination of SERC's
accumulated deficit is offset by SERC's prepaid acquisition costs of $40,000
(post acquisition) at December 31, 1995.
(C) Reflects the elimination of expenses incurred by SERC due to the
Acquisition. SERC's offices will be relocated to the office location of
Telegen.
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<PAGE>
SOLAR ENERGY RESEARCH CORP. AND SUBSIDIARY
(Prior to October 28, 1996, the Predecessor to Telegen Corporation)
THELEGEN CORPORATION
(The Registrant as of October 28, 1996, on a Pro Forma Condensed Basis)
(c) EXHIBITS
Attached herein in Part II, Item 6.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
a) Exhibits
<S> <C>
EXHIBIT
NUMBER DESCRIPTION
2.1++ Plan of Acquisition
3.1(i) Articles of Incorporation
3.1(ii) By-laws
10.1++ Material Contracts
11.1+++ Statement re Computation of Per Share Earnings
16.1 Letter re Change in Certifying Accountant
23.1 Consents of Coopers & Lybrand, L.L.P. Independent Auditors
27.1 Financial Data Schedule
- ----------------------
</TABLE>
++ Incorporated by reference to the Registrant's amended registration statement
on Form S-4 (File No. 333-4037) as originally filed with the Commission on May
17, 1996.
+++ Per share earnings for the Registrant, without giving effect to the
Acquisition, are reported herein, on page 4.
b) Reports on Form 8-K
Not applicable.
-45-
<PAGE>
SIGNATURES
The financial information furnished herein has not been audited by an
independent accountant; however, in the opinion of management, all adjustments
(only consisting of normal recurring accruals) necessary for a fair presentation
of the results of operations for the three months ended September 30, 1996 have
been included.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELEGEN CORPORATION
(Registrant)
Date: November 12, 1996 /s/ WARREN M. DILLARD
---------------------
Warren M. Dillard, on behalf of the Registrant
and as Chief Financial Officer
-46-
<PAGE>
Exhibit 3.1(i) - Part 1
-----------------------
ARTICLES OF INCORPORATION
OF
SOLAR ENERGY RESEARCH CORP.
OF CALIFORNIA
I
The name of this corporation is Solar Energy Research Corp. of California.
II
The purpose of this 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 the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
III
The name and address of this corporation's initial agent for service of
process in the State of California is:
Warren Dillard
353 Vintage Park Drive, Suite H
Foster City, CA 94404
IV
This corporation is authorized to issue two classes of stock, designated as
Common Stock ("Common") and Preferred Stock ("Preferred"). The total number of
shares of Common which this corporation is authorized to issue is 100,000,000,
and the total number of shares of Preferred which this corporation is authorized
to issue is 10,000,000. The Preferred shares authorized by these Articles of
Incorporation may be issued from time to time in one or more series. The Board
of Directors is hereby authorized to fix or alter the rights, preferences and
privileges of any wholly unissued class or series of Preferred shares, and the
number of shares constituting any such series and the designation thereof, or
any of them.
V
Section 1. Limitation of Directors' Liability. The liability of the
----------------------------------
directors of this corporation for monetary damages shall be eliminated to the
fullest extent permissible under California law.
Section 2. Indemnification of Corporate Agents. This corporation is
-----------------------------------
authorized to provide indemnification of agents (as defined in Section 317 of
the California Corporations Code) through bylaw provisions, agreements with
agents, vote of shareholders or disinterested directors or otherwise, in excess
of the indemnification otherwise permitted by Section 317 of the California
Corporations Code, subject only to the applicable limits set forth in Section
204 of the California Corporations Code with respect to actions for breach of
duty to the corporation and its shareholders.
<PAGE>
Section 3. Repeal or Modification. Any repeal or modification of the
----------------------
foregoing provisions of this Article V by the shareholders of the corporation
shall not adversely affect any right or protection of a director of the
corporation existing at the time of such repeal or modification.
Date: August 29, 1996
/s/ THOMAS C. DEFILIPPS
----------------------------------
Thomas C. DeFilipps, Incorporator
-2-
<PAGE>
Exhibit 3.1(i) - Part 2
-----------------------
CERTIFICATE OF AMENDMENT OF
ARTICLES OF INCORPORATION
OF
SOLAR ENERGY RESEARCH CORP.
OF CALIFORNIA
The undersigned certifies that:
1. The undersigned is the President and Secretary of Solar Energy Research Corp.
of California, a California corporation.
2. Article I of the Articles of Incorporation of this corporation is amended to
read as follows:
"The name of this corporation is Telegen Corporation."
3. The foregoing amendment of Articles of Incorporation has been duly approved
by the board of directors.
4. The foregoing amendment of 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
1,000 Common. The number of shares voting in favor of the amendment equaled or
exceeded the vote required. The percentage vote required was more than 50%.
The undersigned further declares under penalty or perjury under the laws of the
State of California that the matters set forth in this certificate are true and
correct of his own knowledge.
Date: September 25, 1996
/s/ James Wiegand
---------------------------------------
James Wiegand, President and Secretary
<PAGE>
Exhibit 3.1(ii)
---------------
BYLAWS
OF
TELEGEN CORPORATION
ARTICLE
CORPORATE OFFICES
-----------------
1.1 PRINCIPAL OFFICE
----------------
The board of directors shall fix the location of the principal executive
office of the corporation at any place within or outside the State of
California. If the principal executive office is located outside such state and
the corporation has one or more business offices in such state, then the board
of directors shall fix and designate a principal business office in the State of
California.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of shareholders shall be held at any place within or outside the
State of California designated by the board of directors. In the absence of any
such designation, shareholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of shareholders shall be held each year on a date and at a
time designated by the board of directors. In the absence of such designation,
the annual meeting of shareholders shall be held on the fourth of June in each
year at 2:00 p.m. However, if such day falls on a legal holiday, then the
meeting shall be held at the same time and place on the next succeeding full
business day. At the meeting, directors shall be elected, and any other proper
business may be transacted.
2.3 SPECIAL MEETING
---------------
A special meeting of the shareholders may be called at any time by the board
of directors, or by the chairman of the board, or by the president, or by one or
more shareholders holding shares in the aggregate entitled to cast not less than
ten percent (10%) of the votes at that meeting.
If a special meeting is called by any person or persons other than the board
of directors or the president or the chairman of the board, then the request
shall be in writing, specifying the time of such meeting and the general nature
of the business proposed
-1-
<PAGE>
to be transacted, and shall be delivered personally or sent by registered mail
or by telegraphic or other facsimile transmission to the chairman of the board,
the president, any vice president or the secretary of the corporation. The
officer receiving the request shall cause notice to be promptly given to the
shareholders entitled to vote, in accordance with the pro visions of Sections
2.4 and 2.5 of these bylaws, that a meeting will be held at the time requested
by the person or persons calling the meeting, so long as that time is not less
than thirty-five (35) nor more than sixty (60) days after the receipt of the
request. If the notice is not given within twenty (20) days after receipt of the
request, then the person or persons requesting the meeting may give the notice.
Nothing contained in this paragraph of this Section 2.3 shall be construed as
limiting, fixing or affecting the time when a meeting of shareholders called by
action of the board of directors may be held.
2.4 NOTICE OF SHAREHOLDERS' MEETINGS
--------------------------------
All notices of meetings of shareholders shall be sent or otherwise given in
accordance with Section 2.5 of these bylaws not less than ten (10) (or, if sent
by third-class mail pursuant to Section 2.5 of these bylaws, thirty (30)) nor
more than sixty (60) days before the date of the meeting. The notice shall
specify the place, date, and hour of the meeting and (i) in the case of a
special meeting, the general nature of the business to be transacted (no
business other than that specified in the notice may be transacted) or (ii) in
the case of the annual meeting, those matters which the board of directors, at
the time of giving the notice, intends to present for action by the shareholders
(but subject to the provisions of the next paragraph of this Section 2.4 any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the Corporations Code of California (the
"Code"), (ii) an amendment of the articles of incorporation, pursuant to Section
902 of the Code, (iii) a reorganization of the corporation, pursuant to Section
1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to
Section 1900 of the Code, or (v) a distribution in dissolution other than in
accordance with the rights of outstanding preferred shares, pursuant to Section
2007 of the Code, then the notice shall also state the general nature of that
proposal.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of shareholders shall be given either (i)
personally or (ii) by first-class mail or (iii) by third-class mail but only if
the corporation has outstanding shares held of record by five hundred (500) or
more persons (determined as provided in Section 605 of the Code) on the record
date for the shareholders' meeting, or (iv) by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the shareholder at the address of that shareholder
appearing on the books of the corporation or given by the shareholder to the
corporation for the purpose of notice. If no such address appears on the
corporation's books or is given, notice shall be deemed to have been given if
sent to that shareholder by mail or telegraphic or other written communication
to the corporation's principal executive office, or if published at least once
in a newspaper of general circulation in the county where that office is
located. Notice shall be deemed to have been given at the time when delivered
personally or deposited in the mail or sent by telegram or other means of
written communication.
If any notice addressed to a shareholder at the address of that 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 that address, then
all future notices or reports shall be deemed to have been duly given without
further mailing if the same shall be available to the shareholder on written
demand of the shareholder at the principal executive office of the corporation
for a period of one (1) year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
-2-
<PAGE>
2.6 QUORUM
------
The presence in person or by proxy of the holders of a majority of the shares
entitled to vote thereat constitutes a quorum for the transaction of business at
all meetings of shareholders. The shareholders present at a duly called or held
meeting at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough shareholders 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.
2.7 ADJOURNED MEETING; NOTICE
-------------------------
Any shareholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of the majority of the
shares represented at that meeting, either in person or by proxy. In the
absence of a quorum, no other business may be transacted at that meeting except
as provided in Section 2.6 of these bylaws.
When any meeting of shareholders, either annual or special, is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place are announced at the meeting at which the adjournment is taken.
However, if a new record date for the adjourned meeting is fixed or if the
adjournment is for more than forty-five (45) days from the date set for the
original meeting, then notice of the adjourned meeting shall be given. Notice
of any such adjourned meeting shall be given to each shareholder of record
entitled to vote at the adjourned meeting in accordance with the provisions of
Sections 2.4 and 2.5 of these bylaws. At any adjourned meeting the corporation
may transact any business which might have been transacted at the original
meeting.
2.8 VOTING
------
The shareholders entitled to vote at any meeting of shareholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 702 through 704 of the Code (relating to
voting shares held by a fiduciary, in the name of a corporation or in joint
ownership).
The shareholders' vote may be by voice vote or by ballot; provided, however,
that any election for directors must be by ballot if demanded by any shareholder
at the meeting and before the voting has begun.
Except as provided in the last paragraph of this Section 2.8, or as may be
otherwise provided in the articles of incorporation, each outstanding share,
regardless of class, shall be entitled to one vote on each matter submitted to a
vote of the shareholders. Any shareholder entitled to vote on any matter may
vote part of the shares in favor of the proposal and refrain from voting the
remaining shares or, except when the matter is the election of directors, may
vote them against the proposal; but, if the shareholder fails to specify the
number of shares which the shareholder is voting affirmatively, it will be
conclusively presumed that the shareholder's approving vote is with respect to
all shares which the shareholder is entitled to vote.
If a quorum is present, the affirmative vote of the majority of the shares
represented and voting at a duly held meeting (which shares voting affirmatively
also constitute at least a majority of the required quorum) shall be the act of
the shareholders, unless the vote of a greater number or a vote by classes is
required by the Code or by the articles of incorporation.
At a shareholders' meeting at which directors are to be elected, a
shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes which such shareholder normally
is entitled to cast) if the candidates' names have been placed in nomination
prior to commencement of the voting and the shareholder has given notice prior
to commencement of the voting of the shareholder's intention to cumulate votes.
If any shareholder has given such a notice, then every shareholder entitled to
vote may cumulate votes for candidates in nomination either (i) by giving one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which that shareholder's shares are
normally entitled or (ii) by distributing the shareholder's votes on the same
principle among any or all of the candidates, as the shareholder thinks fit. The
candidates receiving the highest number of affirmative votes, up to the number
of directors to be elected, shall be elected; votes against any candidate and
votes withheld shall have no legal effect.
-3-
<PAGE>
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT
-------------------------------------------------
The transactions of any meeting of shareholders, either annual or special,
however called and noticed, and wherever held, shall be as valid as though they
had been taken 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 person entitled to vote, who was not present in person or by
proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. The waiver of notice or consent
or approval need not specify either the business to be transacted or the purpose
of any annual or special meeting of shareholders, except that if action is taken
or proposed to be taken for approval of any of those matters specified in the
second paragraph of Section 2.4 of these bylaws, the waiver of notice or consent
or approval shall state the general nature of the proposal. All such waivers,
consents, and approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of notice
of and presence at that 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. Attendance at a meeting is not a waiver of any
right to object to the consideration of matters required by the Code to be
included in the notice of the meeting but not so included, if that objection is
expressly made at the meeting.
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Any action which may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, is signed by the holders
of outstanding shares having not less than the minimum number of votes that
would be necessary to authorize or take that action at a meeting at which all
shares entitled to vote on that action were present and voted.
In the case of election of directors, such a consent shall be effective only
if signed by the holders of all outstanding shares entitled to vote for the
election of directors. However, a director may be elected at any time to fill
any vacancy on the board of directors, provided that it was not created by
removal of a director and that it has not been filled by the directors, by the
written consent of the holders of a majority of the outstanding shares entitled
to vote for the election of directors.
All such consents shall be maintained in the corporate records. Any
shareholder giving a written consent, or the share holder's proxy holders, or a
transferee of the shares, or a personal representative of the shareholder, or
their respective proxy holders, may revoke the consent by a writing received by
the secretary of the corporation before written consents of the number of shares
required to authorize the proposed action have been filed with the secretary.
If the consents of all shareholders entitled to vote have not been solicited
in writing and if the unanimous written consent of all such shareholders has not
been received, then the secretary shall give prompt notice of the corporate
action approved by the shareholders without a meeting. Such notice shall be
given to those shareholders entitled to vote who have not consented in writing
and shall be given in the manner specified in Section 2.5 of these bylaws. In
the case of approval of (i) a contract or transaction in which a director has a
direct or indirect financial interest, pursuant to Section 310 of the Code, (ii)
indemnification of a corporate "agent," pursuant to Section 317 of the Code,
(iii) a reorganization of the corporation, pursuant to Section 1201 of the Code,
and (iv) a distribution in dissolution other than in accordance with the
rights of outstanding preferred shares, pursuant to Section 2007 of the Code,
the notice shall be given at least ten (10) days before the consummation of any
action authorized by that approval.
2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS
-----------------------------------------------------------
For purposes of determining the shareholders entitled to notice of any
meeting or to vote thereat or entitled to give consent to corporate action
without a meeting, the board of directors may fix, in advance, a record date,
which shall not be more than sixty (60) days nor less than ten (10) days before
the date of any such meeting nor more than sixty (60) days before any such
action without a meeting, and in such event only shareholders of record on the
date so fixed are entitled to notice and to vote or to give
-4-
<PAGE>
consents, as the case may be, notwithstanding any transfer of any shares on the
books of the corporation after the record date, except as otherwise provided in
the Code.
If the board of directors does not so fix a record date:
(a) 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; and
(b) the record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the board has been taken, shall be the day on which the first written
consent is given, or (ii) when prior action by the board has been taken, shall
be at the close of business on the day on which the board adopts the resolution
relating to that action, or the sixtieth (60th) day before the date of such
other action, whichever is later.
The record date for any other purpose shall be as provided in Article VIII of
these bylaws.
2.12 PROXIES
-------
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation. A proxy shall be deemed signed if the shareholder's name is placed
on the proxy (whether by manual signature, typewriting, telegraphic transmission
or otherwise) by the shareholder or the shareholder's attorney-in-fact. A
validly executed proxy which does not state that it is irrevocable shall
continue in full force and effect unless (i) the person who executed the proxy
revokes it prior to the time of voting by delivering a writing to the
corporation stating that the proxy is revoked or by executing a subsequent proxy
and presenting it to the meeting or by voting in person at the meeting, or (ii)
written notice of the death or incapacity of the maker of that proxy is received
by the corporation before the vote pursuant to that proxy is counted; provided,
however, that no proxy shall be valid after the expiration of eleven (11) months
from the date of the proxy, unless otherwise provided in the proxy. The dates
contained on the forms of proxy presumptively determine the order of execution,
regardless of the postmark dates on the envelopes in which they are mailed. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Sections 705(e) and 705(f) of the Code.
2.13 INSPECTORS OF ELECTION
----------------------
Before any meeting of shareholders, the board of directors may appoint an
inspector or inspectors of election to act at the meeting or its adjournment.
If no inspector of election is so appointed, then the chairman of the meeting
may, and on the request of any shareholder or a shareholder's proxy shall,
appoint an inspector or inspectors of election to act at the meeting. The
number of inspectors shall be either one (1) or three (3). If inspectors are
appointed at a meeting pursuant to the request of one (1) or more shareholders
or proxies, then the holders of a majority of shares or their proxies present at
the meeting shall determine whether one (1) or three (3) inspectors are to be
appointed. If any person appointed as inspector fails to appear or fails or
refuses to act, then the chairman of the meeting may, and upon the request of
any shareholder or a shareholder's proxy shall, appoint a person to fill that
vacancy.
Such inspectors shall:
(a) determine the number of shares outstanding and the voting power of
each, the number of shares represented at the meeting, the existence of a
quorum, and the authenticity, validity, and effect of proxies;
(b) receive votes, ballots or consents;
(c) hear and determine all challenges and questions in any way arising
in connection with the right to vote;
-5-
<PAGE>
(d) count and tabulate all votes or consents;
(e) determine when the polls shall close;
(f) determine the result; and
(g) do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the Code and any limitations in the articles of
incorporation and these bylaws relating 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.
3.2 NUMBER OF DIRECTORS
-------------------
The number of directors shall be not less than four (4) nor more than seven
(7). The exact number of directors shall be six (6) until changed, within the
limits specified above, by a bylaw amending this Section 3.2, duly adopted by
the board of directors or by the shareholders. The indefinite number of
directors may be changed, or a definite number may be fixed without provision
for an indefinite number, by a duly adopted amendment to the articles of
incorporation or by an amendment to this bylaw duly adopted by the vote or
written consent of holders of a majority of the outstanding shares entitled to
vote; provided, however, that an amendment reducing the fixed number or the
minimum number of directors to a number less than five (5) cannot be adopted if
the votes cast against its adoption at a meeting, or the shares not consenting
in the case of an action by written consent, are equal to more than sixteen and
two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon.
No amendment may change the stated maximum number of authorized directors to a
number greater than two (2) times the stated minimum number of directors minus
one (1).
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
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<PAGE>
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
----------------------------------------
Directors shall be elected at each annual meeting of shareholders to hold
office until the next annual meeting. 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 has been elected and qualified.
3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign effective on giving written notice to the chairman of
the board, the president, the secretary or the board of directors, unless the
notice specifies a later time for that resignation to become effective. If the
resignation of a director is effective at a future time, the board of directors
may elect a successor to take office when the resignation becomes effective.
Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote or
written consent of the shareholders or by court order may be filled only by the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute a majority of the required quorum), or by the unanimous written
consent of all shares entitled to vote thereon. Each director so elected shall
hold office until the next annual meeting of the shareholders and until a
successor has been elected and qualified.
A vacancy or vacancies in the board of directors shall be deemed to exist (i)
in the event of the death, resignation or removal of any director, (ii) if the
board of directors by resolution declares vacant the office of a director who
has been declared of unsound mind by an order of court or convicted of a felony,
(iii) if the authorized number of directors is increased, or (iv) if the
shareholders fail, at any meeting of shareholders at which any director or
directors are elected, to elect the number of directors to be elected at that
meeting.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors, but any such election other
than to fill a vacancy created by removal, if by written consent, shall require
the consent of the holders of a majority of the outstanding shares entitled to
vote thereon.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
Regular meetings of the board of directors may be held at any place within or
outside the State of California that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board may be held at any place within or outside the State of
California that has been designated in the notice of the meeting or, if not
stated in the notice or if there is no notice, at the principal executive office
of the corporation.
Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in the
meeting can hear one another; and all such directors shall be deemed to be
present in person at the meeting.
3.6 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice if the
times of such meetings are fixed by the board of directors.
3.7 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes may be
called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
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<PAGE>
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.8 QUORUM
------
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.10
of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of
Section 310 of the Code (as to approval of contracts or transactions in which a
director has a direct or indirect material financial interest), Section 311 of
the Code (as to appointment of committees), Section 317(e) of the Code (as to
indemnification of directors), the articles of incorporation, and other
applicable law.
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 that meeting.
3.9 WAIVER OF NOTICE
----------------
Notice of a meeting need not be given to any director (i) who signs a waiver
of notice or a consent to holding the meeting or an approval of the minutes
thereof, whether before or after the meeting, or (ii) who attends the meeting
without protesting, prior thereto or at its commencement, the lack of notice to
such directors. All such waivers, consents, and approvals shall be filed with
the corporate records or made part of the minutes of the meeting. A waiver of
notice need not specify the purpose of any regular or special meeting of the
board of directors.
3.10 ADJOURNMENT
-----------
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting to another time and place.
3.11 NOTICE OF ADJOURNMENT
---------------------
Notice of the time and place of holding an adjourned meeting need not be
given unless the meeting is adjourned for more than twenty-four (24) hours. If
the meeting is adjourned for more than twenty-four (24) hours, then notice of
the time and place of the adjourned meeting shall be given before the adjourned
meeting takes place, in the manner specified in Section 3.7 of these bylaws, to
the directors who were not present at the time of the adjournment.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Any action required or permitted to be taken by the board of directors may be
taken without a meeting, provided that all members of the board individually or
collectively consent in writing to that action. Such action by written consent
shall have the same force and effect as a unanimous vote of the board of
directors. Such written consent and any counterparts thereof shall be filed with
the minutes of the proceedings of the board.
3.13 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
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<PAGE>
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.13 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
3.14 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may, upon the approval of the board of directors alone, make
loans of money or property to, or guarantee the obligations of, any officer of
the corporation or its parent or subsidiary, whether or not a director, or adopt
an employee benefit plan or plans authorizing such loans or guaranties provided
that (i) the board of directors determines that such a loan or guaranty or plan
may reasonably be expected to benefit the corporation, (ii) the corporation has
outstanding shares held of record by 100 or more persons (determined as provided
in Section 605 of the Code) on the date of approval by the board of directors,
and (iii) the approval of the board of directors is by a vote sufficient without
counting the vote of any interested director or directors.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) 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 committee, to the
extent provided in the resolution of the board, shall have all the authority of
the board, except with respect to:
(a) the approval of any action which, under the Code, also requires
shareholders' approval or approval of the outstanding shares;
(b) the filling of vacancies on the board of directors or in any
committee;
(c) the fixing of compensation of the directors for serving on the
board or any committee;
(d) the amendment or repeal of these bylaws or the adoption of new
bylaws;
(e) the amendment or repeal of any resolution of the board of directors
which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation, except at a
rate or in a periodic amount or within a price range determined by the board of
directors; or
(g) the appointment of any other committees of the board of directors
or the members of such committees.
- ------------------------
* This section is effective only if it has been approved by the shareholders
in accordance with Sections 315(b) and 152 of the Code.
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<PAGE>
4.2 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice),
Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section
3.12 (action without meeting), with such changes in the context of those bylaws
as are necessary to substitute the committee and its members for the board of
directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the board of directors
or by resolution of the com mittee, that special meetings of committees may also
be called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of
the board of directors, a chairman of the board, one or more vice presidents,
one or more assistant secretaries, one or more assistant treasurers, and such
other officers as may be appointed in accordance with the provisions of Section
5.3 of these bylaws. Any number of offices may be held by the same person.
5.2 ELECTION OF OFFICERS
--------------------
The officers of the corporation, except such officers as may be appointed in
accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws,
shall be chosen by the board, subject to the rights, if any, of an officer under
any contract of employment.
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or may empower the president to appoint,
such other officers as the business of the corporation may require, each of whom
shall hold office for such period, have such authority, and perform such duties
as are provided in these bylaws or as the board of directors may from time to
time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors at any regular or special meeting of the board or, except in
case of an officer chosen by the board of directors, by any officer upon whom
such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
--------------------
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<PAGE>
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if present,
preside at meetings of the board of directors and exercise and perform such
other powers and duties as may from time to time be assigned to him by the board
of directors or as may be prescribed by these bylaws. If there is no president,
then the chairman of the board shall also be the chief executive officer of the
corporation and shall have the powers and duties prescribed in Section 5.7 of
these bylaws.
5.7 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 the officers of the corporation. He
shall preside at all meetings of the shareholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation, and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENTS
---------------
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, a
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, these bylaws, the
president or the chairman of the board.
5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors and shareholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
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 of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all shareholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of the
shareholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by these bylaws.
5.10 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 accounts of the properties
and business transactions of the corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, retained earnings,
and shares. The books of account shall at all reasonable times be open to
inspection by any director.
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<PAGE>
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries 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 chief financial officer 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.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
--------------------------------------------------
AND OTHER AGENTS
----------------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted by
the Code, indemnify each of its directors and officers against expenses (as
defined in Section 317(a) of the Code), judgments, fines, settlements, and other
amounts actually and reasonably incurred in connection with any proceeding (as
defined in Section 317(a) of the Code), arising by reason of the fact that such
person is or was an agent of the corporation. For purposes of this Article VI,
a "director" or "officer" of the corporation includes any person (i) who is or
was a director or officer of the corporation, (ii) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was a
director or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the extent and in the manner
permitted by the Code, to indemnify each of its employees and agents (other than
directors and officers) against expenses (as defined in Section 317(a) of the
Code), judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding (as defined in Section 317(a) of the
Code), arising by reason of the fact that such person is or was an agent of the
corporation. For purposes of this Article VI, an "employee" or "agent" of the
corporation (other than a director or officer) includes any person (i) who is or
was an employee or agent of the corporation, (ii) who is or was serving at the
request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 PAYMENT OF EXPENSES IN ADVANCE
------------------------------
Expenses incurred in defending any civil or criminal action or proceeding for
which indemnification is required pursuant to Section 6.1 or for which
indemnification is permitted pursuant to Section 6.2 following authorization
thereof by the Board of Directors shall be paid by the corporation in advance of
the final disposition of such action or proceeding upon receipt of an
undertaking by or on behalf of the indemnified party to repay such amount if it
shall ultimately be determined that the indemnified party is not entitled to be
indemnified as authorized in this Article VI.
6.4 INDEMNITY NOT EXCLUSIVE
-----------------------
The indemnification provided by this Article VI shall not be deemed exclusive
of any other rights to which those seeking indemnification may be entitled under
any bylaw, agreement, vote of shareholders or 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 that such additional rights to
indemnification are authorized in the Articles of Incorporation.
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<PAGE>
6.5 INSURANCE INDEMNIFICATION
-------------------------
The corporation shall have the power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation against any liability asserted against or incurred by such person in
such capacity or arising out of such person's status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of this Article VI.
6.6 CONFLICTS
---------
No indemnification or advance shall be made under this Article VI, except
where such indemnification or advance is mandated by law or the order, judgment
or decree of any court of competent jurisdiction, in any circumstance where it
appears:
(1) That it would be inconsistent with a provision of the Articles of
Incorporation, these bylaws, a resolution of the shareholders or an agreement in
effect at the time of the accrual of the alleged cause of the action asserted in
the proceeding in which the expenses were incurred or other amounts were paid,
which prohibits or otherwise limits indemnification; or
(2) That it would be inconsistent with any condition expressly imposed by
a court in approving a settlement.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER
--------------------------------------------
The corporation shall keep either at its principal executive office or at the
office of its transfer agent or registrar (if either be appointed), as
determined by resolution of the board of directors, a record of its shareholders
listing the names and addresses of all shareholders and the number and class of
shares held by each shareholder.
A shareholder or shareholders of the corporation who holds at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation or who holds at least one percent (1%) of such voting shares and has
filed a Schedule 14B with the Securities and Exchange Commission relating to the
election of directors, may (i) inspect and copy the records of shareholders'
names, addresses, and shareholdings during usual business hours on five (5)
days' prior written demand on the corporation, (ii) obtain from the transfer
agent of the corporation, on written demand and on the tender of such transfer
agent's usual charges for such list, a list of the names and addresses of the
shareholders who are entitled to vote for the election of directors, and their
shareholdings, as of the most recent record date for which that list has been
compiled or as of a date specified by the shareholder after the date of demand.
Such list shall be made available to any such shareholder by the transfer agent
on or before the later of five (5) days after the demand is received or five (5)
days after the date specified in the demand as the date as of which the list is
to be compiled.
The record of shareholders shall also be open to inspection on the written
demand of any shareholder or holder of a voting trust certificate, at any time
during usual business hours, for a purpose reasonably related to the holder's
interests as a shareholder or as the holder of a voting trust certificate.
Any inspection and copying under this Section 7.1 may be made in person or by
an agent or attorney of the shareholder or holder of a voting trust certificate
making the demand.
7.2 MAINTENANCE AND INSPECTION OF BYLAWS
------------------------------------
The corporation shall keep at its principal executive office or, if its
principal executive office is not in the State of California, at its principal
business office in California the original or a copy of these bylaws as amended
to date, which bylaws shall be open
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<PAGE>
to inspection by the shareholders at all reasonable times during office hours.
If the principal executive office of the corporation is outside the State of
California and the corporation has no principal business office in such state,
then the secretary shall, upon the written request of any shareholder, furnish
to that shareholder a copy of these bylaws as amended to date.
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS
-----------------------------------------------------
The accounting books and records and the minutes of proceedings of the
shareholders, of the board of directors, and of any committee or committees of
the board of directors shall be kept at such place or places as are designated
by the board of directors or, in absence of such designation, at the principal
executive office of the corporation. The minutes shall be kept in written form,
and the accounting books and records shall be kept either in written form or in
any other form capable of being converted into written form.
The minutes and accounting books and records shall be open to inspection upon
the written demand of any shareholder or holder of a voting trust certificate,
at any reasonable time during usual business hours, for a purpose reasonably
related to the holder's interests as a shareholder or as the holder of a voting
trust certificate. The inspection may be made in person or by an agent or
attorney and shall include the right to copy and make extracts. Such rights of
inspection shall extend to the records of each subsidiary corporation of the
corporation.
7.4 INSPECTION BY DIRECTORS
-----------------------
Every director shall have the absolute right at any reasonable time to
inspect all books, records, and documents of every kind as well as the physical
properties of the corporation and each of its subsidiary corporations. Such
inspection by a director may be made in person or by an agent or attorney. The
right of inspection includes the right to copy and make extracts of documents.
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER
-------------------------------------
The board of directors shall cause an annual report to be sent to the
shareholders not later than one hundred twenty (120) days after the close of the
fiscal year adopted by the corporation. Such report shall be sent at least
fifteen (15) days (or, if sent by third-class mail, thirty-five (35) days)
before the annual meeting of shareholders to be held during the next fiscal year
and in the manner specified in Section 2.5 of these bylaws for giving notice to
shareholders of the corporation.
The annual report shall contain (i) a balance sheet as of the end of the
fiscal year, (ii) an income statement, (iii) a statement of changes in financial
position for the fiscal year, and (iv) any report of independent accountants or,
if there is no such report, the certificate of an authorized officer of the
corporation that the statements were prepared without audit from the books and
records of the corporation.
The foregoing requirement of an annual report shall be waived so long as the
shares of the corporation are held by fewer than one hundred (100) holders of
record.
7.6 FINANCIAL STATEMENTS
--------------------
If no annual report for the fiscal year has been sent to shareholders, then
the corporation shall, upon the written request of any shareholder made more
than one hundred twenty (120) days after the close of such fiscal year, deliver
or mail to the person making the request, within thirty (30) days thereafter, a
copy of a balance sheet as of the end of such fiscal year and an income
statement and statement of changes in financial position for such fiscal year.
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<PAGE>
If a shareholder or shareholders holding at least five percent (5%) of the
outstanding shares of any class of stock of the corporation makes a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the then current fiscal year
ended more than thirty (30) days before the date of the request, and for a
balance sheet of the corporation as of the end of that period, then the chief
financial officer shall cause that statement to be prepared, if not already
prepared, and shall deliver personally or mail that statement or statements to
the person making the request within thirty (30) days after the receipt of the
request. If the corporation has not sent to the shareholders its annual report
for the last fiscal year, the statements referred to in the first paragraph of
this Section 7.6 shall likewise be delivered or mailed to the shareholder or
shareholders within thirty (30) days after the request.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or by the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation, or
any other person authorized by the board of directors or the president or a vice
president, is 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 may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
-----------------------------------------------------
For purposes of determining the shareholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
shareholders entitled to exercise any rights in respect of any other lawful
action (other than action by shareholders by written consent without a meeting),
the board of directors may fix, in advance, a record date, which shall not be
more than sixty (60) days before any such action. In that case, only
shareholders of record at the close of business on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided in the Code.
If the board of directors does not so fix a record date, then the record date
for determining shareholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution or the
sixtieth (60th) day before the date of that action, whichever is later.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
-----------------------------------------
From time to time, the board of directors shall determine by resolution which
person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
--------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may
-15-
<PAGE>
be general or confined to specific instances. Unless so authorized or ratified
by the board of directors or within the agency power of an officer, 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 for any amount.
8.4 CERTIFICATES FOR SHARES
-----------------------
A certificate or certificates for shares of the corporation shall be issued
to each shareholder when any of such shares are fully paid. The board of
directors may authorize the issuance of certificates for shares partly paid
provided that these certificates shall state the total amount of the
consideration to be paid for them and the amount actually paid. All
certificates shall be signed in the name of the corporation by the chairman of
the board or the vice chairman of the board or the president or a vice president
and by the chief financial officer or an assistant treasurer or the secretary or
an 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 on a certifi cate ceases to be that officer,
transfer agent or registrar before that certificate is issued, it may be issued
by the corporation with the same effect as if that person were an officer,
transfer agent or registrar at the date of issue.
8.5 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.5, no new certificates for shares shall
be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.6 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Code shall govern the construction of these
bylaws. Without limiting the generality of this provision, the singular number
includes the plural, the plural number includes the singular, and the term
"person" includes both a corporation and a natural person.
ARTICLE X
AMENDMENTS
----------
9.1 AMENDMENT BY SHAREHOLDERS
-------------------------
New bylaws may be adopted or these bylaws may be amended or repealed by the
vote or written consent of holders of a majority of the outstanding shares
entitled to vote; provided, however, that if the articles of incorporation of
the corporation set forth the number of authorized directors of the corporation,
then the authorized number of directors may be changed only by an amendment of
the articles of incorporation.
9.2 AMENDMENT BY DIRECTORS
----------------------
Subject to the rights of the shareholders as provided in Section 9.1 of these
bylaws, bylaws, other than a bylaw or an amendment of a bylaw changing the
authorized number of directors (except to fix the authorized number of directors
pursuant to a bylaw providing for a variable number of directors), may be
adopted, amended or repealed by the board of directors.
-16-
<PAGE>
Exhibit 16.1
------------
November 11, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sirs:
We, Cordovano & Company, P.C., independent accountants, agree in all respects
with the statements made by Telegen Corporation, a California corporation (the
"Registrant") in Part II, Item 5.4, "Changes in Registrant's Certifying
Accountant" of the Registrant's Form 10-QSB for the quarterly period ended
September 30, 1996.
Sincerely,
Cordovano & Company, P.C.
Independent Accountants
<PAGE>
Exhibit 23.1
------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in Form 10-QSB of the registrant for the quarterly
period ended September 30, 1996, of our report dated April 19, 1996, on our
audits of the financial statements of Telegen Communications Corporation
(formerly Telegen Corporation), a California corporation, as of December 31,
1995 and 1994, and for the years ended December 31, 1995 and 1994.
COOPERS & LYBRAND, L.L.P.
Sacramento, California
November 12, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000906448
<NAME> TELEGEN CORPORATION, A CALIFORNIA CORPORATION
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 103
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,018
<PP&E> 0
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<CURRENT-LIABILITIES> 53,389
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0
0
<COMMON> 713,798
<OTHER-SE> (766,169)
<TOTAL-LIABILITY-AND-EQUITY> 1,018
<SALES> 0
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<CGS> 0
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<OTHER-EXPENSES> 155,995
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,353
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<NET-INCOME> (155,995)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
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