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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 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)
(415) 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 June 30, 1997, was 5,253,863.
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER
JUNE 30, 31,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 622,358 $ 3,166,657
Accounts receivable, Trade.......................... 108,132 17,784
Accounts receivable, Other.......................... 1,186,551 248,703
Inventory........................................... 151,280 173,841
Prepaid expenses.................................... -- 387,609
----------- -----------
Total current assets.............................. 2,068,321 3,994,594
Property and equipment, net........................... 1,854,291 1,664,374
Other assets.......................................... 117,700 68,354
----------- -----------
Total assets...................................... $ 4,040,312 $ 5,727,322
=========== ===========
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Current mat. notes payable.......................... $ 187,571 $ 270,916
Trade accounts payable.............................. 806,333 357,366
Account payable other............................... -- --
Accrued expenses.................................... 646,910 664,251
----------- -----------
Total current liabilities......................... 1,640,814 1,292,533
Capital lease....................................... 6,618 18,549
----------- -----------
Total liabilities................................. 1,647,432 1,311,082
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTES 4 AND 6)
Minority interests.................................... 160,846 325,077
Shareholders equity:
Series A Convertible Preferred Stock................ 4,580,000 --
Common stock........................................ 10,815,011 10,399,318
Additional paid-in capital.......................... 3,113,719 4,133,640
Accumulated deficit................................. (16,276,696) (10,441,795)
----------- -----------
Total shareholders equity......................... 2,232,034 4,092,163
----------- -----------
Total liabilities and stockholders' equity...... $ 4,040,312 $ 5,727,322
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Sales................................................ $ 489,470 $ 82,873
Cost of goods........................................ 35,314 2,118
----------- -----------
Gross profit......................................... 454,156 80,755
Operating expense:
Sales and marketing................................ 385,594 4,511
Research and development........................... 1,324,808 216,688
General and administrative 2,024,040 751,721
----------- -----------
Loss from operations................................. (3,280,286) (892,165)
Other income and expense
Interest income.................................... 10,805 53,859
Interest expense (3,011) (180,644)
----------- -----------
Loss before taxes.................................... (3,272,492) (1,018,950)
Provision for taxes.................................. -- --
----------- -----------
Net loss before minority interest.................... (3,272,492) (1,018,950)
----------- -----------
Minority interest in subsidiary net loss............. 78,264 --
----------- -----------
Net loss............................................. $(3,194,228) $(1,018,950)
Accretion of Preferred Stock Discounts............... (789,275) --
----------- -----------
Net loss attributable to common shareholders......... (3,983,503) (1,018,950)
----------- -----------
Weighted average common shares outstanding........... 5,148,257 4,328,950
Net loss per share................................... $ (0.77) $ (0.24)
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Sales................................................ $ 649,286 $ 196,389
Cost of goods........................................ 69,820 12,914
----------- -----------
Gross profit......................................... 579,466 183,475
Operating expense:
Sales and marketing................................ 1,157,238 5,388
Research and development........................... 2,265,777 304,572
General and administrative......................... 3,101,610 1,203,007
----------- -----------
Loss from operations................................. (5,945,159) (1,329,492)
Other income and expense
Interest income.................................... 29,056 55,616
Interest expense................................... (9,625) (215,066)
----------- -----------
Loss before taxes.................................... (5,925,728) (1,488,942)
Provision for taxes.................................. -- --
----------- -----------
Net loss before minority interest.................... (5,925,728) (1,488,942)
----------- -----------
Minority interest in subsidiary net loss............. 90,827 --
----------- -----------
Net loss............................................. $(5,834,901) $(1,488,942)
Accretion of Preferred Stock Discounts............... (1,005,075) --
----------- -----------
Net loss attributable to common shareholders......... (6,839,976) (1,488,942)
----------- -----------
Weighted average common shares outstanding........... 5,094,824 4,074,693
Net loss per share................................... $ (1.34) $ (0.37)
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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TELEGEN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flow from operating activities
Net loss........................................... $(5,834,901) $(1,488,942)
Adjustments to reconcile net loss to net cash used
in operating activities:
Minority interests in subsidiary net loss........ (90,827) --
Depreciation..................................... 206,881 33,772
Amortization..................................... -- 2,700
Amortization of deferred finance cost............ -- 197,248
Operating expenses paid with issuance of common
stock........................................... 113,139 100,498
Interest expense added to note payable 4,833 188,560
Changes in assets and liabilities:
Decrease (increase) in accounts receivable..... (1,028,196) (41,653)
Decrease (increase) in inventory............... 22,561 43,596
Decrease (increase) in prepaid expenses........ 387,609 --
Decrease (increase) in other assets............ (49,346) (54,243)
Increase (decrease) in accounts payable........ 448,967 (964,388)
Increase (decrease) in accrued expenses........ (17,341) (225,585)
Cash flows used in financing activities:
Purchase of fixed assets............................. (396,798) (154,931)
Purchase of intangible assets........................ -- --
Net cash provided by (used in) investing activities.. (396,798) (154,931)
Cash flows from financing activities:
Net proceeds from borrowings....................... -- 299,016
Principal payments on notes payable................ (88,178) (884,257)
Principal payments on capital leases............... (11,931) --
Issuance of common stock........................... 214,304 10,667,431
Issuance of Preferred Stock, net of offering costs. 3,574,925 --
Net cash provided by financing activities.......... 3,689,120 10,082,190
Cash and cash equivalents at beginning of period..... 3,166,657 178,340
Cash and cash equivalents at end of period........... 622,358 7,897,162
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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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
Inventory consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
Raw materials and supplies......................... $ 93,313 $ 88,555
Finished goods--ACS................................ 57,967 85,286
--------- ---------
$ 151,280 $ 173,841
========= =========
</TABLE>
3. Costs and Expenses
Operating expenses for the three months ended June 30, 1997 increased
significantly from the second quarter of 1996. Increases in sales and
marketing expenses for 1997 resulted from the Company's participation in the
Electronic Entertainment Expo in Atlanta, Georgia in June 1997. 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. The increase in general and administrative
expenses in 1997 is attributable to patent activity, increased staff levels,
increased legal and accounting costs, and higher facility costs at the new
location.
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 is accrued over the period from issuance to the earliest
conversion date, using the interest method. The financing is 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. As of June 30, 1997 the Company had in escrow and
reflected as cash on the balance sheet, the net proceeds of an additional
issuance of $500,000 in face value of Series A Preferred stock for which the
Company was obligated to issue 500 shares of Series A Preferred stock. The
remaining funding of $1,000,000 in face value of Series A Preferred Stock
under the first tranche of the Series A Private Placement will occur at such
time when Telegen and Series A Preferred Stock investor agree that the
Company's stock price and trading volume for the Company's Common Stock
justify and support such funding. Any remaining funding under the Series A
Private Placement is dependent on the Company achieving certain financial
goals. 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 at
a fixed price per share (fair 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 at a
fixed price per share (fair value at the date of issuance). The Series A
Preferred Stock is convertible at any time at the holder's option and is
automatically
6
<PAGE>
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
converted on December 30, 1998. The conversion ratio is based on a formula in
the agreement. 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 agreement. The Company has also
agreed not to sell any new equity series at a discount except in certain
circumstances as defined in the agreement.
5. Supplemental Disclosure of Non-Cash Investing and Financing Activities
During the three months ended June 30, 1997 and 1996, the Company issued
19,652 and 12,390 shares of common stock, respectively, in lieu of cash as
payment for legal fees and employee services of $110,686 and $58,247,
respectively.
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 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 June 30, 1997 and 1996 are not materially different
from the EPS amount currently presented on the Company's Financial Statements
herein.
7
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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 second quarter of 1997, revenues were derived primarily from the
operations of Telegen Communications Corporation, a California corporation and
wholly owned subsidiary of Telegen ("TCC"). Telegen has incurred significant
operating losses in every fiscal year since its inception, and, as of June 30,
1997, Telegen had an accumulated deficit of $16,276,696. As of June 30, 1997
Telegen has working capital of $427,507. Telegen expects to continue to incur
substantial operating losses through 1997. In order to become profitable,
Telegen must successfully increase sales of its existing products, develop new
products for its existing markets and for new markets, increase gross margins
through higher volumes and manufacturing efficiencies, manage its operating
expenses and expand its distribution capability, all of which are occurring on
a continuing basis.
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 second quarter of 1997 were $489,470, compared to
$82,873 for the second quarter of 1996. 1997 revenues consisted primarily of
TCC revenues of $400,520 of which approximately $300,000 was final payment
under the MCI contract. The remaining $89,950 of 1997 revenues consisted of
Morning Star Multimedia, Inc., a New Jersey corporation and wholly owned
subsidiary of Telegen ("MSM") revenues from software services under contract
and product sales. 1996 revenues consisted primarily of MSM revenues of
$79,556 from software services under contract. The remaining $3,317 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 $35,314 for the second quarter of
1997 and $2,118 for the second quarter of 1996. Cost of goods sold for the
second quarter of 1997 consisted of $29,604 for revenues derived from TCC and
$5,710 for revenues derived from MSM. Cost of goods sold for the second
quarter of 1996 consisted of $2,069 for revenues derived from TCC and $49 for
revenues derived from MSM.
Research and Development. Research and development expenses were $1,324,808
for the second quarter of 1997 and $216,688 for the second 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 as well as
expanded research and development activities at TCC. Of the 1997 research and
development expenses, $684,023 were attributable to TDL, $466,674 were
attributable to MSM and $174,111 were attributable to TCC. Of the 1996
research and development expenses, $65,102 were attributable to TDL, $6,079
were attributable to MSM and $145,507 were attributable to TCC.
8
<PAGE>
Sales and Marketing. Sales and marketing expenses for the second quarter of
1997 were $385,594 compared with $4,511 for the second quarter of 1996. Of the
1997 sales and marketing expenses, $111 was attributable to TDL, $195,663 was
attributable to MSM, and $189,820 was attributable to TCC and Telegen
Corporation. In the second quarter of 1996 none of the sales and marketing
expenses were attributable to TDL, $139 was attributable to MSM and $4,372 was
to TCC. Substantially all of the sales and marketing expenses for the second
quarter of 1997 attributable to MSM were related to participation in the
Electronic Entertainment Expo in Atlanta in June of 1997. Increases in sales
and marketing expenses for TCC for 1997 were related to increases in marketing
staff, creation of new marketing materials, and public relations costs related
to Telegen as a public company.
General and Administrative. General and Administrative expenses for the
second quarter of 1997 were $2,024,040 as compared with $751,721 for the
second quarter of 1996. Of the 1997 general and administrative expenses
$161,181 were attributable to TDL, $325,961 were attributable to MSM and
$1,536,898 were attributable to TCC and Telegen Corporation. Of the 1996
general and administrative expenses $31,525 were attributable to TDL, $118,222
were attributable to MSM and $601,974 were attributable to TCC and Telegen
Corporation. The increase in general and administrative expenses related to
TDL and TCC/Telegen for 1997 as compared to 1996 were related to legal and
consulting fees associated with patent activity, increased administrative
staffing and relocation of TDL and TCC/Telegen to a new and larger facility,
and for TCC/Telegen increased legal and accounting fees related to SEC
compliance.
Interest Income and Expenses. Net interest income for the second quarter of
1997 was $7,794 as compared with net interest expense of $126,785 for the
second quarter of 1996. Of the second quarter of 1997 interest income and
expense TDL contributed $3,766 of interest income and no interest expense, MSM
contributed no interest income and $260 of interest expense, and TCC and
Telegen Corporation contributed $7,039 of interest income and $2,751 of
interest expense, respectively. Of the second quarter of 1996 interest income
and expense TDL contributed $9,085 of interest income and no interest expense,
MSM contributed $8 of interest income and no interest expense, and TCC and
Telegen Corporation contributed $44,766 of interest income and $180,644 of
interest expense, respectively. Decreases in interest income for 1997 for TDL
and TCC/Telegen Corporation were the result of decreased interest bearing
deposits on account. Interest expenses for TCC and Telegen Corporation for the
second quarter of 1996 were comprised primarily of bridge loan expenses. The
bridge loans were paid off in May 1996 from the proceeds of a private
placement completed in May 1996.
LIQUIDITY AND CAPITAL RESOURCES
Telegen has funded its operations primarily through private placements of
its equity securities with individual and institutional investors. As of June
30, 1997, Telegen had raised $10,815,011 in net capital through the sale of
Telegen common stock, $3,574,925 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 is 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 June 30,
1997, the second portion of the first tranche was issued resulting in $359,925
net proceeds which as of that date for purposes of accounting were held in an
escrow account which will result in $3.6 million in net proceeds to Telegen,
of which $2.5 million was received in March, 1997 and $360,000 was in escrow
in June, 1997.
Telegen issued 19,652 shares of common stock and 12,390 shares of common
stock during the second quarter of 1997 and 1996, respectively, in lieu of
cash as payment for certain operating expenses, primarily legal fees and
employees services, amounting to $110,686 and $58,247, respectively.
9
<PAGE>
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, and scheduled funding of
Series A 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 are for the purchase of equipment
which is required to establish a laboratory and prototype production line for
that panel display subsidiary, TDL. TDL will require significant additional
capital to move into a manufacturing phase. The total amount of funds expected
to be required to build that limited production line is approximately $5
million.
Telegen's actual working capital needs will depend upon numerous factors
including the progress of Telegen's research and development activities, the
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. Due to the financial and business milestones
required under the Series A Preferred Stock agreement, there can be no
assurance that Telegen will not require additional equity or debt financing in
the near future.
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 Operating Losses; Accumulated Deficit and Minimum Revenues
Telegen, and its subsidiaries, have been engaged in lengthy development of
their products and have incurred significant operating losses in every fiscal
year since its inception. The cumulative net operating loss for the period
from inception through June 30, 1997 was $16,276,696. In order to become
profitable, Telegen must increase sales of its existing products, sustain
volume manufacturing of its products at increased levels, develop new products
for new and existing markets, and manage its operating expenses and expand its
distribution capability. There can be no assurance that Telegen will meet and
realize these objectives or ever achieve profitability.
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. Although Telegen
believes that its existing capital resources, including expected future
scheduled funding of Series A Preferred Stock and revenues from operations,
will be adequate to meet Telegen's cash requirements through 1998, such
funding and revenues are dependent upon certain events in the future.
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.
While Telegen believes it has arranged for the capital needed to complete
development of a finished prototype of the HGED flat panel display technology,
additional capital will be needed to establish a production capability. There
can be no assurance that any additional financing will be available to Telegen
on acceptable terms, if at all. If adequate funds are not available as
required, Telegen's results of operations from the flat panel technology will
be materially adversely affected.
10
<PAGE>
Telegen's Exposure to Technological and Market Change
The market for Telegen's products is characterized by rapid technological
change and evolving industry standards and is highly competitive with respect
to timely product innovation. The introduction of products embodying new
technology and the emergence of new industry standards can render existing
products obsolete and unmarketable. Telegen's success will be dependent in
part upon its ability to anticipate changes in technology and industry
standards and to successfully develop and introduce new and enhanced products
on a timely basis. If Telegen is unable to do so, Telegen's results of
operations will be materially adversely affected. For example, Telegen took a
longer period 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. There can be no assurance that Telegen will be
successful in the development of its flat panel technology or that Telegen
will not encounter technical or other serious difficulties in its development
or commercialization which would materially adversely affect Telegen's results
of operations.
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.
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.
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.
11
<PAGE>
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. 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
materially adversely affect Telegen's results of operations. Certain
components used in Telegen's telecommunications products, such as
microprocessors, are available from only a limited number of sources. Although
to date Telegen has generally been able to obtain adequate supplies of these
components, Telegen obtains these components on a purchase order basis and
does not have long-term contracts with any of these suppliers. In addition,
some suppliers require that Telegen either pre-pay the price of components
being purchased or establish an irrevocable letter of credit for the amount of
the purchase. Telegen anticipates that, as it begins manufacture of other
products, it will encounter similar limitations regarding the components for
those products. Telegen's inability in the future to obtain sufficient
limited-source components for its telecommunications and other products, or to
develop alternative sources, could result in delays in product introductions
or shipments, which could have a material adverse effect on Telegen's results
of operations.
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
12
<PAGE>
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.
Dispute Over Canceled Telegen Shares
In August 1991, Old Telegen (now TCC) issued an aggregate of 208,592 shares
of common stock to Sahara Associates, Inc. ("Sahara") in connection with a
letter of credit and related financing to be obtained by Old Telegen. A letter
of credit in the amount of $300,000 was issued in favor of Old Telegen by Bank
Sadarat but Old Telegen was unable to realize any benefit from such a letter
of credit. In September 1992, Bank Sadarat filed a complaint against Old
Telegen in the Superior Court of the State of California for the County of San
Mateo for approximately $110,000 advanced under a separate letter of credit.
In March 1993, Old Telegen canceled the 208,592 shares issued to Sahara and
filed a cross-complaint for declaratory relief against Sahara and others. In
that action, Old Telegen sought a judicial declaration that the issuance of
the aforementioned shares was void for lack of consideration, that the action
of Old Telegen in canceling such shares was valid and that the persons to whom
such shares were issued have no rights as shareholders of Old Telegen. The
case was removed to the Federal District Court for the Northern District of
California. In July 1996, Old Telegen settled Bank Sadarat's claim by paying
Bank Sadarat $100,000, which is less than the liability for the Bank Sadarat
claim that is reflected in Old Telegen's (now TCC's) Financial Statements
which are incorporated by reference herein. The dispute with Sahara regarding
the canceled shares has not yet been resolved. Although the number of shares
and percentages of the outstanding shares referred to in this Registration
Statement reflect the cancellation of shares issued to Sahara, there can be no
assurance as to the ultimate result of the litigation with Sahara.
13
<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 as described in the
Securities Act of 1933, as amended. The placement agent will also 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 has three tranches, with the closing of the first tranche
being amended by an amendment (the "Amendment") to the Financing subscription
agreement which provides for funding in parts: (i) $3,500,000 in stated value
of the Series A Preferred Stock on March 22, 1997 and (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, if it occurs, will be for $5,000,000 in stated value. In order for
Telegen to be able to request any additional funds after the initial
$5,000,000, the Company must have a twenty (20) day average dollar volume of
the Company's stock on the Nasdaq SmallCap Market equal to or greater than
four hundred fifty thousand dollars ($450,000) per day.
The financing requires that at the closing of each tranche, Telegen 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 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 Series A Preferred may be converted into Telegen common stock at any
time based on a ratio which adjusts with the then current market price of
Telegen's common stock, or the market price at closing whichever is higher.
Telegen may force conversion of any outstanding Series A Preferred Stock at
any time after December 31, 1998. The Company granted the purchaser of the
Series A Preferred Stock a right of first refusal on certain future sales of
discounted equity securities.
Telegen also has a call option for a period of time beginning one hundred
twenty (120) days following the first closing date of the first tranche to
repurchase any outstanding portion of the Series A Preferred plus accrued
dividends at a price of one hundred percent (100%) of the stated value
($1,000) plus accrued dividends, payable in cash.
In connection with the Financing, Telegen agreed not to sell any new equity
series at a discount to the then-current market price per share of the common
stock, other than offerings in connection with mergers, acquisitions, and
certain benefit plans, for a period of one hundred twenty (120) days from the
initial closing of the first tranche.
14
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during the
quarter ended June 30, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
3.1* Articles of Incorporation of Registrant
3.2* Bylaws of Registrant
4.1** Subscription Agreement for Series A Preferred Stock, dated March 22,
1997
4.2*** Amendment Agreement to Subscription Agreement for Series A Preferred
Stock, dated July 7, 1997
10.8+ Shareholder Agreement by and between TCC and Janmil Holdings PTE
LTD, dated June 4, 1997
11.1++ Statements Re Computation Per Share Earnings
27.1 Financial Disclosure Schedule
</TABLE>
- --------
<TABLE>
<C> <S>
* 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 8, 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.
</TABLE>
The following is a list of Current Reports on Form 8-K filed by the
Registrant during the quarter ended June 30, 1997:
1. 8-K filed May 9, 1997 to report the hiring of G. Fred Forsythe as
President and CEO of the Registrant's ninety-percent owned subsidiary,
Telegen Display Laboratories, Inc.
2. 8-K filed May 19, 1997 to report the resignation of G. Fred Forsythe as
President and CEO of the Registrant's ninety-percent owned subsidiary,
Telegen Display Laboratories, Inc.
15
<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
/s/ Warren M. Dillard
Date: August 14, 1997 By: _________________________________
Warren M. Dillard
Chief Financial Officer
(Duly Authorized Officer and
Principal
Financial and Accounting Officer)
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
27.1 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 622,358
<SECURITIES> 0
<RECEIVABLES> 1,294,683
<ALLOWANCES> 0
<INVENTORY> 151,280
<CURRENT-ASSETS> 2,068,321
<PP&E> 1,854,291
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,040,312
<CURRENT-LIABILITIES> 1,640,814
<BONDS> 0
0
4,580,000
<COMMON> 10,815,001
<OTHER-SE> (13,162,977)
<TOTAL-LIABILITY-AND-EQUITY> 4,040,312
<SALES> 489,470
<TOTAL-REVENUES> 489,470
<CGS> 35,314
<TOTAL-COSTS> 35,314
<OTHER-EXPENSES> 3,734,442
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,011)
<INCOME-PRETAX> (3,272,492)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,272,492)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,194,228)
<EPS-PRIMARY> (0.77)
<EPS-DILUTED> (0.77)
</TABLE>
