<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
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: 0-21471
TELEGEN CORPORATION
(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 Number)
101 SAGINAW DRIVE
REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices, including zip code)
(650) 261-9400
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days.
YES [X] NO [_]
The number of issued and outstanding shares of the Registrant's Common Stock
as of September 30, 1997, was 6,329,918.
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 735,698 $ 3,166,657
Accounts receivable, Trade.................... 138,429 17,784
Accounts receivable, Other.................... 412,962 248,703
Inventory..................................... 145,822 173,841
Prepaid expenses.............................. -- 387,609
------------ ------------
Total current assets......................... 1,432,911 3,994,594
Property and equipment, net.................... 1,885,430 1,664,374
Other assets................................... 158,427 68,354
------------ ------------
Total assets................................. $ 3,476,768 $ 5,727,322
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturity notes payable................ $ 241,757 $ 270,916
Trade accounts payable........................ 1,473,178 357,366
Account payable other......................... -- --
Accrued expenses.............................. 889,995 664,251
------------ ------------
Total current liabilities.................... 2,604,930 1,292,533
Capital lease.................................. 6,912 18,549
------------ ------------
Total liabilities............................ 2,611,842 1,311,082
------------ ------------
Commitments and contingencies (Notes 4 and 6)
Minority interests............................. 84,721 325,077
------------ ------------
Shareholders' equity:
Series A Convertible Preferred Stock.......... 2,429,245 --
Common stock.................................. 13,445,998 10,399,318
Additional paid-in capital.................... 3,309,719 4,133,640
Accumulated deficit........................... (18,404,757) (10,441,795)
------------ ------------
Total shareholders' equity................... 780,205 4,092,163
------------ ------------
Total liabilities and stockholders' equity... $ 3,476,768 $ 5,727,322
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Sales........................................ $ 259,926 $ 199,050
Cost of goods............................... 38,666 3,958
----------- -----------
Gross profit............................... 221,260 195,092
Operating expense:
Sales and marketing......................... 67,638 102,484
Research and development.................... 1,106,839 722,511
General and administrative.................. 1,239,135 909,650
----------- -----------
Loss from operations....................... (2,192,352) (1,539,553)
Other income and expense
Interest income............................. 111 89,076
Interest expense............................ (4,010) 80,284
----------- -----------
Loss before taxes.......................... (2,196,251) (1,370,193)
Provision for taxes.......................... -- --
----------- -----------
Net loss before minority interest........... (2,196,251) (1,370,193)
----------- -----------
Minority interest in subsidiary net loss.... 76,125 66,055
----------- -----------
Net loss................................... $(2,120,126) $(1,304,138)
Accretion of Preferred Stock Discounts....... 196,000 --
----------- -----------
Net loss attributable to common shareholders. (1,924,126) (1,304,138)
=========== ===========
Weighted average common shares outstanding... 5,741,197 4,987,335
Net loss per share........................... $ (0.34) $ (0.26)
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Sales........................................ $ 909,212 $ 395,439
Cost of goods............................... 108,481 16,871
----------- -----------
Gross profit............................... 800,731 378,568
Operating expense:
Sales and marketing......................... 1,235,274 107,871
Research and development.................... 3,372,520 1,027,596
General and administrative.................. 4,338,033 2,113,176
----------- -----------
Loss from operations....................... (8,145,096) (2,870,075)
Other income and expense
Interest income............................. 29,167 144,692
Interest expense............................ (13,985) (134,782)
----------- -----------
Loss before taxes.......................... (8,129,914) (2,860,165)
Provision for taxes.......................... -- --
----------- -----------
Net loss before minority interest........... (8,129,914) (2,860,165)
----------- -----------
Minority interest in subsidiary net loss.... 166,952 66,055
----------- -----------
Net loss................................... $(7,962,962) $(2,794,110)
Accretion of Preferred Stock Discounts....... (809,075) --
----------- -----------
Net loss attributable to common shareholders. (8,772,037) (2,794,110)
=========== ===========
Weighted average common shares outstanding... 5,310,282 4,504,612
Net loss per share........................... $ (1.65) $ (0.62)
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
TELEGEN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flow from operating activities
Net loss................................................................... $(7,962,962) $(2,794,110)
Adjustments to reconcile net loss to net cash used in operating activities:
Minority interests in subsidiary net loss.................................. (166,952) (66,055)
Depreciation............................................................... 317,003 74,152
Amortization............................................................... -- 2,217
Amortization of deferred finance cost...................................... -- 197,248
Operating expenses paid with issuance of common stock...................... 156,296 271,493
Interest expense added to note payable..................................... 7,251 107,847
Changes in assets and liabilities:
Decrease (increase) in accounts receivable................................ (284,904) (108,445)
Decrease (increase) in inventory.......................................... 28,019 49,091
Decrease (increase) in prepaid expenses................................... 387,609 --
Decrease (increase) in other assets....................................... (90,073) (54,913)
Increase (decrease) in accounts payable................................... 1,115,812 (877,897)
Increase (decrease) in accrued expenses................................... 225,744 (115,916)
----------- -----------
Total adjustments........................................................ 1,695,805 (521,178)
----------- -----------
Net cash used in operating activities.................................... (6,267,157) (3,315,288)
----------- -----------
Cash flows used in financing activities:
Purchase of fixed assets................................................... (538,059) (907,115)
Purchase of intangible assets.............................................. -- --
----------- -----------
Net cash provided by (used in) investing activities...................... (538,059) (907,115)
Cash flows from financing activities:
Net proceeds from borrowings............................................... 52,449 299,422
Principal payments on notes payable........................................ (88,859) (1,036,619)
Principal payments on capital leases....................................... (11,637) --
Issuance of common stock................................................... 2,802,134 10,801,343
Issuance of Preferred Stock, net of offering costs......................... 1,620,170 15,330
----------- -----------
Net cash provided by financing activities................................. 4,374,257 10,079,476
----------- -----------
Net increase (decrease) in cash and cash equivalents........................ (2,430,959) 5,857,073
Cash and cash equivalents at beginning of period............................ 3,166,657 178,340
----------- -----------
Cash and cash equivalents at end of period.................................. $ 735,698 $ 6,035,413
</TABLE>
The accompanying notes are an integral part of these financial statements.
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TELEGEN CORPORATION AND SUBSIDIARIES
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 (Company) in accordance with the accounting
policies used in the preparation of the financial statements for the year ended
December 31, 1996 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
<TABLE>
<CAPTION>
Inventory consists of the following:
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Raw materials and supplies $ 92,383 $ 88,555
Finished goods - ACS 53,439 85,286
-------- --------
$145,822 $173,841
======== ========
</TABLE>
3. Costs and Expenses
Operating expenses for the three months ended September 30, 1997 increased
significantly from the third quarter of 1996. Sales and marketing expenses were
significantly lower in 1997 than 1996; higher sales and marketing expenses for
1996 had resulted from the Company's preparation for participation in the 1997
Winter Consumer Electronics Show and development of new marketing materials.
Increases in research and development expenses for 1997 resulted from the
establishment of a full scale research facility for Telegen Display
Laboratories, Inc., one of the Company's subsidiaries and from increased
research and development activities at Morning Star Multimedia, inc., another of
the Company's subsidiaries. The increase in general and administrative expenses
in 1997 is attributable to patent activity, increased legal and accounting
costs, and higher facility costs at 101 Saginaw Drive, Redwood City, California.
4. Shareholder's Equity
On March 21, 1997, the Company partially completed a private placement with
a face value of up to $15 million to support the Company's research and
development programs and for general working capital purposes. The private
placement agreement provides for 8% Cumulative Series A Preferred Stock,
issuable at a 20% discount from face value (the "Series A Private Placement").
The 20% discount was accrued over the period from issuance to the earliest
conversion date, using the interest method. The financing was expected to take
place in three tranches, each amounting to $5 million in face value. At March
31, 1997, the Company had issued 3,500 shares of Series A Preferred, with a face
value of $3,500,000. In July 1997 the Company received the net proceeds of an
additional $500,000 face value of Series A Preferred stock for which the Company
issued 500 shares of Series A Preferred stock. The remaining funding of the
Series A Preferred Placement is not expected to occur. In addition, warrants
were issued to the holders to purchase common stock in an aggregate amount of
20% of the value of the Series A Preferred actually funded at a fixed price per
share (fair market value at the date of issuance). In addition to an 8%
commission, placement agents received warrants to purchase common stock in an
aggregate amount of 10% of the face value of the Series A Preferred actually
funded at a fixed price per share (fair market value at the date of issuance).
The Series A Preferred Stock is convertible at any time at the holder's option
and is automatically converted on December 30, 1998. The conversion ratio is
based on a formula in the Series A Certificate of Determination. The Company has
a call option beginning 120 days following the first tranche to repurchase any
outstanding portion of the securities at face value plus accrued dividends as
defined in the Series A Preferred Stock Subscription Agreement. The Company has
also agreed not to sell any new equity
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<PAGE>
series at a discount except in certain circumstances as defined in the Series A
Preferred Stock Subscription Agreement which circumstances have occurred.
Telegen has also entered into an Amendment Agreement to the Series A
Preferred Stock Subscription Agreement dated July 7, 1997 (the "Amendment
Agreement") which entitled the Series A Preferred Stock holder to additional
discounts of 3%, 6% or 9% off of the Conversion Price, as that term is defined
in the Amendment Agreement, based upon the time at which the Series A holder
converts the Series A Preferred Stock into Common Stock. The 3% discount off of
the Conversion Price was available from July 19, 1997 until August 18, 1997, the
6% discount off of the Conversion Price was available from August 19, 1997 until
September 19, 1997, and the 9% discount off of the Conversion Price is available
from September 20, 1997 until all of the outstanding Series A Preferred Stock is
converted. As of September 30, 1997 $1,700,000 in face value of the new Series A
Convertible Preferred Stock had been converted to 636,922 shares of Telegen
common stock.
As of September 30, 1997 the Company had in escrow and reflected as cash on
the balance sheet the net of $1,000,000 as proceeds from the private offering on
a subscription basis of 500,000 units (each, a "Unit") to accredited investors
(the "Unit Investors") with a purchase price per unit of $2.00. Each Unit
consists of (i) one share of Common Stock , (ii) a $0.01 Warrant, and (iii) a
warrant to purchase one share of the Company's Common Stock at a $4.00 per share
exercise price (each, a "$4.00 Warrant", the $0.01 Warrants and the $4.00
Warrants are collectively the "Warrants"). As of October 21, the Unit Offering
was fully subscribed. As part of the consideration for placing the Units and
for fully subscribing the Unit Offering, the Company issued Capitol Bay
Securities, the placement agent for the Offering ("CBS"), 50,000 $0.01 Warrants.
The Common Stock, $0.01 Warrants and $4.00 Warrants purchased under the
Unit Offering and the $0.01 Warrants issued to CBS are subject to lock up
provisions which limit the ability of a holder of Common Stock or a holder of
Common Stock received upon exercise of the Warrants to resell such Common Stock
in a private or open-market transaction. The Units and the CBS Warrants are
divided into four (4) equal groups (each, a "Group"), each having a separate
lock-up period (the "Lock-Up Period") for the resale of Common Stock and the
sale of Common Stock upon exercise of the Warrants. The Lock-Up Period for each
Group expires on January 1, 1998, April 1, 1998, July 1, 1998 and October 1,
1998, respectively.
Under the Unit Offering, the $0.01 Warrants and the $4.00 Warrants have a
four-year term from the date of issuance and are exercisable immediately upon
issuance. The Company has the right to force the exercise of the $4.00 Warrants
after the Company's Common Stock trades for twenty (20) days at $6.00 or more.
The Units and the $0.01 Warrants issued to CBS are "restricted securities"
as that term is defined in Rule 144 and the Registration Statement is used to
register the Unit Investors' resale of the Common Stock purchased and the
issuance of the Common Stock upon the exercise of the Warrants.
5. Supplemental Disclosure of Non-Cash Investing and Financing Activities
During the nine months ended September 30, 1997 and 1996, the Company
issued 45,196 and 47,399 shares of common stock, respectively, in lieu of cash
as payment for legal fees and employee services of $239,546 in 1997 and as
payment for legal fees and employee services of $211,493 and equipment valued at
$60,000 in 1996.
6. 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.
7. New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. SFAS No.
128 eliminates the presentation of primary earnings per share (EPS) and replaces
it with basic EPS (with the principal difference being that common stock
equivalents are no longer included in computing basic EPS), eliminates the
modified treasury stock method for stock options and warrants, eliminates the
three percent materiality provision for determining when primary or fully
diluted EPS should be presented, and revises the treatment for contingent stock
awards. SFAS No. 128 also requires dual presentation of basic and fully diluted
EPS on the face of the income statement for all entities with complex capital
structures regardless of whether basic and diluted EPS are the same, requires
the use of income from continuing operations as the control number for
determining if a computation for diluted EPS would be anti-dilutive, requires
potential common shares to be added to the diluted EPS computation in sequence
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<PAGE>
from the most dilutive to least dilutive, and requires a reconciliation of the
numerator and denominator used in computing basic and fully diluted EPS.
The Company is required to adopt SFAS No. 128 for the year ending December
31, 1997. The pro forma EPS amounts using the provisions of SFAS No. 128 for
the three months ended September 30, 1997 and 1996 are not materially different
from the EPS amount currently presented on the Company's Financial Statements
herein.
-8-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or anticipated results, including those set forth under
"Factors That May Affect Future Results" in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations," in this Quarterly
Report on Form 10-Q filed with the Securities and Exchange Commission, and
elsewhere in or incorporated by reference into this report. The following
discussion should be read in conjunction with the Company's Financial Statements
and Notes thereto included elsewhere in this report.
During the third quarter of 1997, revenues were derived primarily from the
operations of Morning Star Multimedia, Inc., a New Jersey corporation and wholly
owned subsidiary of Telegen ("MSM"). Telegen has incurred significant operating
losses in every fiscal year since its inception, and, as of September 30, 1997,
Telegen had an accumulated deficit of $18,404,757. As of September 30, 1997
Telegen had a working capital deficit of $1,172,019. Telegen expects to
continue to incur substantial operating losses through 1997. In order to become
profitable, Telegen must increase sales of its existing products, develop new
products for new and existing markets, manage its operating expenses and expand
its distribution capability. There can be no assurance that Telegen will meet
and realize these objectives or ever achieve profitability.
Telegen has made significant expenditures for research and development of
its products, and for the establishment of its sales and marketing operations.
In order to remain competitive in a changing business environment, Telegen must
continue to make significant expenditures in these areas. Therefore, Telegen's
operating results will depend in large part on substantial expansion in
Telegen's revenue base.
RESULTS OF OPERATIONS
Revenues. Revenues for the third quarter of 1997 were $259,926, compared
to $199,050 for the third quarter of 1996. 1997 revenues consisted primarily of
MSM revenues of $251,813 from software services under contract and product
sales. The remaining $8,113 of 1997 revenues consisted of Telegen
Communications Corporation, a California Corporation and wholly owned subsidiary
of Telegen ("TCC") revenues from product sales. 1996 revenues consisted
primarily of MSM revenues of $194,162 from software services under contract.
The remaining $4,888 of 1996 revenues consisted of TCC product sales. Prior to
1996 all revenues were derived from TCC product sales.
Cost of Goods Sold. Cost of goods sold was $38,666 for the third quarter
of 1997 and $3,958 for the third quarter of 1996. Cost of goods sold for the
third quarter of 1997 consisted of $32,759 for revenues derived from MSM and
$5,907 for revenues derived from TCC. Cost of goods sold for the third quarter
of 1996 consisted of $758 for revenues derived from MSM and $3,200 for revenues
derived from TCC.
Research and Development. Research and development expenses were
$1,106,839 for the third quarter of 1997 and $722,511 for the third quarter of
1996. Increases in research and development expenses for 1997 resulted from the
establishment of a full scale research facility in Telegen Display Laboratories,
Inc., a California corporation and 90% owned subsidiary of Telegen ("TDL"),
and research and development expenses of MSM. Of the 1997 research and
development expenses, $760,997 were attributable to TDL, $277,059 were
attributable to MSM and $68,783 were attributable to TCC. Of the 1996 research
and development expenses, $569,496 were attributable to TDL, $25,780 were
attributable to MSM and $127,235 were attributable to TCC.
Sales and Marketing. Sales and marketing expenses for the third quarter of
1997 were $67,638 compared with $102,484 for the third quarter of 1996. Of the
1997 sales and marketing expenses, none of the sales and marketing expenses were
attributable to TDL, $3,627 was attributable to MSM, and $64,011 was
attributable to TCC and Telegen Corporation. In the third quarter of 1996 none
of the sales and marketing expenses were attributable to TDL, $10,932 was
attributable to MSM and $91,552 was attributable to TCC. The higher sales and
marketing expenses for the third quarter of 1996 versus the third quarter of
1997 were attributable to the preparation for the 1997 Winter Consumer
Electronics Show and the development of new marketing materials.
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General and Administrative. General and Administrative expenses for the
third quarter of 1997 were $1,239,135 as compared with $909,650 for the third
quarter of 1996. Of the 1997 general and administrative expenses $57,641 were
attributable to TDL, $202,372 were attributable to MSM and $979,122 were
attributable to TCC and Telegen Corporation. Of the 1996 general and
administrative expenses $95,298 were attributable to TDL, $197,251 were
attributable to MSM and $617,101 were attributable to TCC and Telegen
Corporation. The increase in general and administrative expenses related to TCC
and Telegen Corporation for 1997 as compared to 1996 were related to legal and
consulting fees associated with patent activity, relocation of TDL, TCC and
Telegen Corporation to a new and larger facility, and increased legal and
accounting fees related to SEC compliance.
Interest Income and Expenses. Net interest expense for the third quarter
of 1997 was $3,899 as compared with net interest income of $169,360 for the
third quarter of 1996. Of the 1997 interest income and expense TDL contributed
$88 of interest income and no interest expense, MSM contributed no interest
income and $1,283 of interest expense, and TCC and Telegen Corporation
contributed $23 of interest income and $2,727 of interest expense. Of the third
quarter of 1996 interest income and expense TDL contributed $48,884 of interest
income and no interest expense, MSM contributed no interest income and no
interest expense, and TCC and Telegen Corporation contributed $40,192 of
interest income and a negative $80,284 of interest expense. Decreases in
interest income for 1997 for TDL and TCC/Telegen Corporation were the result of
decreased interest bearing deposits on account. The negative interest expense
for TCC and Telegen Corporation for the third quarter of 1996 was the result of
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 AND CAPITAL RESOURCES
Telegen has funded its operations primarily through private placements of
its equity securities with individual and institutional investors. As of
September 30, 1997, Telegen had raised $13,445,998 in net capital through the
sale of Telegen common stock, $1,620,170 in net capital through the sale of
Telegen Series A Convertible Preferred Stock and $4,605,010 in net capital
through the sale of TDL common stock. In February 1996, Telegen initiated a
private offering of its common stock at $5.00 per share. Through May 1996, when
the offering was completed, Telegen had received gross proceeds from this
offering of approximately $6,671,950 for the issuance of 1,334,390 shares of
common stock and paid approximately $1,023,695 in placement agent fees. A
portion of the proceeds from the offering in the amount of $715,000 was used by
Telegen to repay in full the one-year promissory notes related to $715,000 in
Bridge Financing provided through the issuance of one-year notes and 34,892
shares of Telegen's common stock. Additionally, Telegen completed in March 1997
a private placement of a new Series A Convertible Preferred Stock issuable in
three tranches. As of March 31, 1997, the first portion of the first tranche
was issued resulting in $2,494,925 net proceeds to Telegen and as of September
30, 1997, the second portion of the first tranche was issued resulting in
$359,925 net proceeds to Telegen. As of September 30, 1997 $1,700,000 in face
value of the new Series A Convertible Preferred Stock had been converted to
636,922 shares of Telegen common stock.
As of September 30, 1997 the Company had in escrow and reflected as cash on
its balance sheet the net of $1,000,000 as proceeds from the private offering on
a subscription basis of 500,000 units (each, a "Unit") to accredited investors
(the "Unit Investors") with a purchase price per unit of $2.00. Each Unit
consists of (i) one share of Common Stock , (ii) a $0.01 Warrant, and (iii) a
warrant to purchase one share of the Company's Common Stock at a $4.00 per share
exercise price (each, a "$4.00 Warrant", the $0.01 Warrants and the $4.00
Warrants are collectively the "Warrants"). As of October 21, the Unit Offering
was fully subscribed. As part of the consideration for placing the Units and
for fully subscribing the Unit Offering, the Company issued Capitol Bay
Securities, the placement agent for the Offering ("CBS"), 50,000 $0.01 Warrants.
The Common Stock, $0.01 Warrants and $4.00 Warrants purchased under the
Unit Offering and the $0.01 Warrants issued to CBS are subject to lock up
provisions which limit the ability of a holder of Common Stock or a holder of
Common Stock received upon exercise of the Warrants to resell such Common Stock
in a private or open-market transaction. The Units and the CBS Warrants are
divided into four (4) equal groups (each, a "Group"), each having a separate
lock-up period (the "Lock-Up Period") for the resale of Common Stock and the
sale of Common Stock upon exercise of the Warrants. The Lock-Up Period for each
Group expires on January 1, 1998, April 1, 1998, July 1, 1998 and October 1,
1998, respectively.
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<PAGE>
Under the Unit Offering, the $0.01 Warrants and the $4.00 Warrants have a
four-year term from the date of issuance and are exercisable immediately upon
issuance. The Company has the right to force the exercise of the $4.00 Warrants
after the Company's Common Stock trades for twenty (20) days at $6.00 or more.
The Units and the $0.01 Warrants issued to CBS are "restricted securities"
as that term is defined in Rule 144 and the Registration Statement is used to
register the Unit Investors' resale of the Common Stock purchased and the
issuance of the Common Stock upon the exercise of the Warrants.
Telegen issued 8,906 shares of common stock and 24,159 shares of common
stock during the third quarter of 1997 and 1996, respectively, in lieu of cash
as payment for certain operating expenses, primarily legal fees and employees
services, amounting to $43,157 in 1997 and certain operating expenses, primarily
legal fees and employee services, amounting to $110,995 and equipment valued at
$60,000 in 1996.
Telegen's future capital requirements will depend upon many factors,
including the timing of acceptance of Telegen's products in the market, the
progress of Telegen's research and development efforts, Telegen's operating
results and the status of competitive products. Telegen anticipates that its
existing capital resources including expected future, sales of common stock and
Series B Preferred Stock, if they materialize, and revenues from operations will
be adequate to meet Telegen's cash requirements through 1998. Telegen's current
commitments for capital expenditures is related to the purchase of equipment
which is required to establish a laboratory and a prototype production line for
flat panel display subsidiary TDL. TDL will require significant additional
capital to move into a manufacturing phase.
Telegen's actual working capital needs will depend upon numerous factors
including the progress of Telegen's research and development activities, the
costs of increasing Telegen's sales, marketing and manufacturing activities and
the amount of revenues generated from operations, none of which can be
predicted with certainty. It is certain that Telegen's continued operation will
depend on its ability to continue to attract additional equity capital.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The forward-looking statements and other information in this report are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical results or anticipated results, including the
following:
History of Telegen Operating Losses; Accumulated Deficit and Minimum Revenues
Telegen's predecessor, now an operating subsidiary, Telegen Communications
Corporation ("TCC"), was incorporated in 1990 and first shipped products in
1991. Telegen has been engaged in lengthy development of its products and has
incurred significant operating losses in every fiscal year since its
inception. The cumulative net loss for the period from inception through
September 30, 1997 was $18,404,757. In order to become profitable, Telegen
must increase sales of its existing products, develop, commercialize and
sustain volume manufacturing of its flat panel products, develop new products
for new and existing markets, manage its operating expenses and expand its
distribution capability. There can be no assurance that Telegen will meet and
realize these objectives or ever achieve profitability.
Telegen's Future Capital Needs
Telegen's future capital requirements will depend upon many factors,
including the extent and timing of acceptance of Telegen's products in the
market, the progress of Telegen's research and development, Telegen's operating
results and the status of competitive products. Telegen believes that to meet
it's capital requirements through 1998 it will need to attract additional
funding. Additionally, Telegen's actual working capital needs will depend upon
numerous factors, including the progress of Telegen's research and development
activities, the cost of increasing Telegen's sales, marketing and manufacturing
activities and the amount of revenues generated from operations. There can
therefore be no assurance that Telegen will not require additional funding, or
that any additional financing will be available to Telegen on acceptable terms,
if at all. If adequate funds are not available as required, Telegen's results
of operations will be materially adversely affected.
Telegen believes it requires substantial capital to complete development of
a finished prototype of the HGED flat panel display technology, and that
additional capital will be needed to establish a high volume production
capability. There
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<PAGE>
can be no assurance that any additional financing will be available to Telegen
on acceptable terms, if at all. If adequate funds are not available as required,
Telegen's results of operations from the flat panel technology will be
materially adversely affected.
Telegen's Exposure to Technological and Market Change; Difficulty in Developing
Flat Panel Technology
The market for Telegen's products is characterized by rapid technological
change and evolving industry standards and is highly competitive with respect to
timely product innovation. The introduction of products embodying new
technology and the emergence of new industry standards can render existing
products obsolete and unmarketable. Telegen's success will be dependent in part
upon its ability to anticipate changes in technology and industry standards and
to successfully develop and introduce new and enhanced products on a timely
basis. If Telegen is unable to do so, Telegen's results of operations will be
materially adversely affected. For example, Telegen took a longer period of
time than expected to develop its ACS telephone peripheral product line.
Although Telegen believes such delay has not materially affected its ability to
market and sell the ACS products, there can be no assurance that Telegen will
not encounter other technical or similar difficulties that could in the future
delay the introduction of new products or product enhancements. With regards to
MSM, the multimedia industry can be a rapidly changing and highly competitive
industry relating to both the technology and content of the medium. MSM must
stay abreast of technological changes to ensure that its products meet the ever
higher standards that the consumer has come to expect and that will be offered
by competitors' products. Additionally, MSM's success in this field will be
dependent upon its ability to identify marketable concepts, acquire license
rights and develop content in a timely manner to capture the consumer interest.
With regard to its flat panel display technology, there are other more
developed and accepted flat panel display technologies already in commercial
production which will compete with Telegen's technology. The Company has not
finished the development of a completed prototype of the HGED flat panel display
technology and there can be no assurance that Telegen will be successful in the
development of its flat panel technology or that Telegen will not encounter
technical or other serious difficulties in its development, commercialization or
volume manufacturing which would be materially adverse to Telegen's results of
operations.
Telegen's Dependence Upon Key Personnel
Telegen's future success will depend in significant part upon the continued
service of certain key technical and senior management personnel, and Telegen's
ability to attract, assimilate and retain highly qualified technical, managerial
and sales and marketing personnel. Competition for such personnel is intense,
and there can be no assurance that Telegen can retain its existing key
managerial, technical or sales and marketing personnel or that it can attract,
assimilate and retain such employees in the future. The loss of key personnel
or the inability to hire, assimilate or retain qualified personnel in the future
could have a material adverse effect upon Telegen's results of operations.
Telegen has entered into agreements with each of its executive officers (as
well as all other full-time employees) that prohibit disclosure of confidential
information to anyone outside of Telegen both during and subsequent to
employment and require disclosure and assignment to Telegen of all proprietary
rights to any ideas, discoveries or inventions relating to or resulting from the
officer's work for Telegen.
Competition in the Telecommunications Market
The market for telephone peripheral equipment is highly competitive, is
dominated by successful niche marketers and Telegen expects this competition to
continually increase. There are a number of companies which develop,
manufacture and sell telecommunications devices which perform some of the same
functions as those of Telegen's products. There can be no assurance that
Telegen will be able to compete effectively against its competitors, many of
whom may have substantially greater financial resources than Telegen. Further,
some of the telephone call routing functions of Telegen's products can be
provided through reprogramming by Bell Operating Companies of their central
office equipment to allow "equal access" by customers to the long distance
carrier of their choice without "dialing around" by inserting an access code.
Since this "dial around" process is the principal function of Telegen's ACS 2000
and MLD 1000 products, if such an "equal access" feature were introduced, demand
for Telegen's present products would be seriously impaired.
-12-
<PAGE>
TCC's Dependence on Major Customers
Telegen expects that a large proportion of its revenues from its
telecommunications products will be realized from sales to a small number of
companies, primarily the major long distance carriers, the Regional Bell
Operating Companies, as well as other nationwide distributors. The loss of one
or more of these relationships, when developed, could have a material negative
effect on Telegen's results of operations.
During 1995, three customers accounted for approximately 82% of TCC's
revenues: Bell Atlantic, Synernet and Sprint. Of these, Bell Atlantic, which
purchased TCC's Teleblocker product, made up 45% of TCC's total sales for 1995.
The removal of the Teleblocker product from the market in 1996 due to redesign,
effectively eliminated sales to Bell Atlantic and significantly affected total
sales for TCC for 1996.
Competition in the Multimedia Market
The interactive multimedia market is a highly competitive field. MSM
competes against several significantly larger companies which are currently
better known and better funded than MSM, as well as many other small companies.
Some of the larger companies against which MSM competes are Microsoft,
Broderbund, Softkey, Sierra On-Line and Electronic Arts. MSM competes with
these other companies both for the acquisition of licenses with widespread brand
awareness (content for development) and for sales of its developed products to
consumers.
Flat Panel Competition; Flat Panel Patent(s)
The market for flat panel displays is dominated by major Japanese companies
such as Sharp Electronics, Toshiba and Sony. Telegen expects this competition
to continually increase. There can be no assurance that Telegen will be able to
compete effectively against its competitors, many of whom may have substantially
greater financial resources than Telegen. Flat panel displays manufactured
utilizing AMLCD technology have been in production for almost 10 years and have
proven market acceptance. New technologies, such as FED and Color Plasma, are
in development by a number of potential competitors, some of whom have greater
financial resources than Telegen. Telegen does not own or lease a
manufacturing facility for, and has not begun the process of, volume
manufacturing of flat panel displays. There can be no assurance that Telegen's
HGED technology can compete successfully on a cost or display quality basis with
these other technologies. Further, there can be no assurance that Telegen's
efforts to obtain patent protection for its HGED technology will be successful
or, if patent protection is obtained, that Telegen's patent(s) will provide
adequate protection.
Telegen's Dependence Upon Limited Number of Manufacturing Sources and Component
Suppliers
Telegen currently relies upon a limited number of manufacturing sources for
its telecom production capability. Although Telegen is currently seeking to
qualify alternative sources of supply, Telegen has not yet contracted for
alternative suppliers to perform such manufacturing activities. In the event of
an interruption of production or delivery of supplies, Telegen's ability to
deliver its products in a timely fashion would be compromised, which would be
materially adverse to Telegen's results of operations. Certain components used
in Telegen's telecommunications products, such as microprocessors, are available
from only a limited number of sources. Although to date Telegen has generally
been able to obtain adequate supplies of these components, Telegen obtains these
components on a purchase order basis and does not have long-term contracts with
any of these suppliers. In addition, some suppliers require that Telegen either
pre-pay the price of components being purchased or establish an irrevocable
letter of credit for the amount of the purchase. Telegen anticipates that, as
it begins manufacture of other products, it will encounter similar limitations
regarding the components for those products. Telegen's inability in the future
to obtain sufficient limited-source components for its telecommunications and
other products, or to develop alternative sources, could result in delays in
product introductions or shipments, which could have a material adverse effect
on Telegen's results of operations.
-13-
<PAGE>
Telegen's Need to Develop Marketing Experience
Telegen has limited marketing experience, and expanding Telegen's markets
will require significant expenses, including additions to personnel. There can
be no assurance that Telegen will have all the capital resources necessary to
expand its sales and marketing operations, or that Telegen's attempts to expand
its sales and marketing efforts will be successful.
Intellectual Property
Telegen relies on a combination of patents, trade secret and other
intellectual property law, nondisclosure agreements and other protective
measures to preserve its rights pertaining to its products. Such protection,
however, may not preclude competitors from developing products similar to those
of Telegen. In addition, the laws of certain foreign countries do not protect
Telegen's intellectual property rights to the same extent as do the laws of the
United States. There can also be no assurance that third parties will not
assert intellectual property infringement claims against Telegen. One such
matter was recently dismissed without prejudice to the Company but there is no
assurance that more claims will not be initiated from litigants with more
resources than Telegen. There is no assurance that Telegen will prevail in such
litigation seeking damages or an injunction against the sale of Telegen's
products or that Telegen will be able to obtain any necessary licenses on
reasonable terms or at all.
-14-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is party to various legal proceedings or
claims, either asserted or unasserted, which arise in the ordinary course of
business. Management has reviewed pending legal matters and believes that the
resolution of such matters will not have a significant adverse affect on the
Company's financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES
Telegen entered into a subscription agreement to sell to a foreign
accredited investor up to $15,000,000 (the "Financing") in stated value of its
newly created 8% Series A Convertible Preferred Stock (the "Series A Preferred
Stock"), which would yield the Company, after twenty percent (20%) in face value
discounts and eight percent (8%) placement agent fees, up to $10,800,000, under
a Regulation D private placement pursuant to the Securities Act of 1933, as
amended. The placement agent also was to receive warrants to purchase ten
percent (10%) of the face value of any Series A Preferred Stock sold under the
Financing, exercisable for common stock of Telegen. The securities sold rank
senior to any of the Company's common stock. The Series A Preferred Stock pay
dividends at a rate of eight percent (8%) per annum, in the form of cash or
additional shares of Telegen common stock at the option of a holder of such
Series A Preferred Stock.
The Financing had three tranches, with the closing of the first tranche
amended by an Amendment Agreement to the Series A Preferred Subscription
Agreement dated July 7, 1997 (the "Amendment Agreement") which provided for
funding in parts: (i) $3,500,000 in stated value of the Series A Preferred Stock
on March 22, 1997, (ii) $500,000 in stated value which was held in escrow as of
June 30, 1997 and (iii) an additional $1,000,000 in stated value upon agreement
between the Company and the accredited investor that the stock price and trading
volume for the Company's common stock will justify and support such funding.
Each subsequent tranche closing was to be for $5,000,000 in stated value.
The financing required that at the closing of each tranche, Telegen would
issue four-year warrants to purchase an aggregate amount of twenty percent (20%)
of the purchase price of the preferred stock. The exercise price of the 151,351
warrants issued as part of the first closing of the first tranche were modified
pursuant to the Amendment Agreement to such prices at which the Series A
Preferred Stock issued under the first tranche were converted to common stock,
on a proportionate basis.
The Amendment Agreement referenced above also entitled the Series A
Preferred Stock holder to additional discounts off of the Conversion Price, as
that term is defined in the Amendment Agreement, of 3%, 6% or 9% based upon the
time at which the Series A Preferred Stock is converted into common stock. The
3% discount off of the Conversion Price was available from July 19, 1997 until
August 18, 1997, the 6% discount price off of the Conversion Price is available
from August 19, 1997 until September 19, 1997, and the 9% discount off of the
Conversion Price is available from September 20, 1997 until all of the
outstanding Series A Preferred Stock is converted.
As of September 30, 1997 the Company had $1,000,000 in escrow as gross
proceeds from the private offering on a subscription basis of 500,000 units
(each, a "Unit") to accredited investors (the "Unit Investors") with a purchase
price per unit of $2.00. Each Unit consists of (i) one share of Common Stock ,
(ii) a $0.01 Warrant, and (iii) a warrant to purchase one share of the Company's
Common Stock at a $4.00 per share exercise price (each, a "$4.00 Warrant", the
$0.01 Warrants and the $4.00 Warrants are collectively the "Warrants"). As of
October 21, the Unit Offering was fully subscribed. As part of the
consideration for placing the Units and for fully subscribing the Unit Offering,
the Company issued Capitol Bay Securities, the placement agent for the Offering
("CBS"), 50,000 $0.01 Warrants.
The Common Stock, $0.01 Warrants and $4.00 Warrants purchased under the
Unit Offering and the $0.01 Warrants issued to CBS are subject to lock up
provisions which limit the ability of a holder of Common Stock or a holder of
Common Stock received upon exercise of the Warrants to resell such Common Stock
in a private or open-market transaction. The Units and the CBS Warrants are
divided into four (4) equal groups (each, a "Group"), each having a separate
lock-up period (the "Lock-Up Period") for the resale of Common Stock and the
sale of Common Stock upon exercise of the Warrants. The Lock-Up Period for each
Group expires on January 1, 1998, April 1, 1998, July 1, 1998 and October 1,
1998, respectively.
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<PAGE>
Under the Unit Offering, the $0.01 Warrants and the $4.00 Warrants have a
four-year term from the date of issuance and are exercisable immediately upon
issuance. The Company has the right to force the exercise of the $4.00 Warrants
after the Company's Common Stock trades for twenty (20) days at $6.00 or more.
The Units and the $0.01 Warrants issued to CBS are "restricted securities"
as that term is defined in Rule 144 and the Registration Statement is used to
register the Unit Investors' resale of the Common Stock purchased and the
issuance of the Common Stock upon the exercise of the Warrants.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an annual meeting of its shareholders on August 6, 1997 to
adopt the following proposals:
Proposal One: To elect directors to serve until the next annual meeting of
shareholders or until their successors are elected.
The results of the vote electing the Company's directors were as follows:
<TABLE>
<CAPTION>
Nominee Common For Common Withheld
------- ---------- ---------------
<S> <C> <C>
Jessica L. Stevens 3,701,124 156,250
Bonnie Crystal 3,704,967 152,407
Warren M. Dillard 3,716,509 140,865
Frederick T. Lezak, Sr. 3,776,142 81,232
James R. Iverson 3,775,893 81,481
Larry J. Wells 3,775,893 81,481
Gilbert F. Decker 3,776,184 81,190
</TABLE>
Proposal Two: To approve an amendment to the Company's bylaws for the
purpose of increasing the size range of the Company's board of directors from
its present variable range of four (4) to seven (7) directors to a variable
range of five (5) to nine (9) directors and to fix the current size of the board
at seven (7).
The result of the vote to amend the Company's bylaws was as follows:
Common For Common Against Common Abstain
---------- -------------- --------------
2,626,944 27,109 16,718
Proposal Three: To ratify the appointment of Coopers & Lybrand L.L.P. as
independent accountants for the Company for the fiscal year ending December 31,
1997.
The results of the vote ratifying the appointment of Coopers & Lybrand
L.L.P. as the Company's independent auditors was as follows:
Common For Common Against Common Abstain
---------- -------------- --------------
3,839,041 7,044 11,289
-16-
<PAGE>
ITEM 5. OTHER INFORMATION
On October 23, 1997, TSC, LLC, a Delaware limited liability company entered
into an amended and restated stock purchase agreement with Jessica L. Stevens,
an affiliate of the Company for the purchase of 550,000 shares of Common Stock
in a private transaction. The purchase price for each share of Common Stock
under the Purchase Agreement was $1.73 for a total purchase price of $951,500,
$250,000 of which is payable in cash and $701,500 of which is payable in the
form of a promissory note.
In a press release dated October 31, 1997, Telegen Corporation, a
California corporation (the "Company"), announced a realignment of its
management team, the resignation of a director and the appointment of a new
director to fill the vacancy. Jessica L. Stevens was terminated from her
position as the Company's President and Chief Technology Officer, and Bonnie
Crystal was terminated from her position as the Company's Executive Vice
President and Secretary. Both Ms. Stevens and Ms. Crystal remain directors of
the Company. Warren M. Dillard resigned from his position as the Company's
Chief Executive Officer, Chief Financial Officer and Chief Operating Officer and
resigned from his position on the Company's Board of Directors.
The Company's Board appointed former GE Intersil executive Fred Kashkooli
as acting Chief Executive Officer and will recruit to fill the other vacant
management positions as required. Gregory Bell replaces Warren Dillard as a
director of the Company for the remainder of Mr. Dillard's term of service.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) EXHIBIT
NO. EXHIBIT TITLE
------- ------------------------------------------------------------------
<C> <S>
3.1* Articles of the Registrant
3.2* Bylaws of the Registrant
4.1** Subscription Agreement for Series A Preferred Stock
4.2*** Amendment Agreement to Subscription Agreement for Series A Preferred
Stock, dated July 7, 1997
10.8+ Shareholder Agreement by and between Telegen Communications Corporation
and Janmil Holdings PTE LTD, dated June 4, 1997.
11.1++ Statements Re Computation Per Share Earnings
27.1 Financial Data Schedule
</TABLE>
_____________
* Incorporated by reference to exhibit filed with the Registrant's Quarterly
Report on Form 10-QSB, as filed with the Commission on November 12, 1996.
** Incorporated by reference to exhibit filed with the Registrant's Report on
Form 8-K, as filed with the Commission on March 25, 1997.
*** Incorporated by reference to exhibit filed with the Registrant's Report on
Form 8-K, as filed with the Commission on August 11, 1997.
+ Incorporated by reference to exhibit filed with the Registrant's Report on
Form 8-K as filed with the Commission on July 8, 1997.
++ Incorporated in this Form 10-Q in Note 7 to part 1 Item 1 Financial
Statements.
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<PAGE>
(b) Reports of Form 8-K
The following is a list of Current Reports on Form 8-K filed by the
Registrant during the quarter ended September 30, 1997:
1. 8-K filed on July 8, 1997 to report that Telegen Communications
Corporation, the Registrant's wholly owned subsidiary, has
entered into a Shareholder Agreement with Janmil Holdings PTE
LTD, dated June 4, 1997.
2. 8-K filed on August 11, 1997 to report that the Registrant
entered into an Amendment Agreement to the 8% Series "A"
Convertible Preferred Stock Subscription Agreement dated July 7,
1997 by and between the Registrant and Silenus Limited.
3. 8-K filed on August 19, 1997 to report the realignment of the
Registrant's management team.
-18-
<PAGE>
SIGNATURE
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, in the City of Redwood City, California.
TELEGEN CORPORATION
Date: November 14, 1997 By: /s/ Fred Kashkooli
-----------------------------------
Fred Kashkooli
Chief Executive Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
-19-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NO.
- ------- ----------------------------------------------------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
-20-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 735,698
<SECURITIES> 0
<RECEIVABLES> 551,391
<ALLOWANCES> 0
<INVENTORY> 145,822
<CURRENT-ASSETS> 1,432,911
<PP&E> 1,885,430
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,476,768
<CURRENT-LIABILITIES> 2,604,930
<BONDS> 0
0
2,429,245
<COMMON> 13,445,998
<OTHER-SE> 15,095,038
<TOTAL-LIABILITY-AND-EQUITY> 3,476,768
<SALES> 259,926
<TOTAL-REVENUES> 259,926
<CGS> 38,666
<TOTAL-COSTS> 38,666
<OTHER-EXPENSES> 2,413,612
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (4,010)
<INCOME-PRETAX> (2,196,251)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,196,251)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,120,126)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
