<PAGE>
===============================================================================
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 MARCH 31, 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 March 31, 1997, was 5,076,612.
===============================================================================
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 2,898,541 $ 3,166,657
Accounts receivable, Trade.................... 33,545 17,784
Accounts receivable, Other.................... 426,311 248,703
Inventory..................................... 174,293 173,841
Prepaid expenses.............................. -- 387,609
------------ ------------
Total current assets.................. 3,532,690 3,994,594
Property and equipment, net..................... 1,796,193 1,664,374
Other assets.................................... 123,125 68,354
------------ ------------
Total assets.......................... 5,452,008 5,727,322
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable.......... 202,744 270,916
Trade accounts payable........................ 171,564 357,366
Account payable other......................... 71,274 --
Accrued expenses.............................. 617,679 664,251
------------ ------------
Total current liabilities............. 1,063,261 1,292,533
Capital lease................................... 11,343 18,549
------------ ------------
Total liabilities..................... 1,074,604 1,311,082
------------ ------------
Commitments and contingencies (Notes 4 and 6)
Minority interests.............................. 239,110 325,077
------------ ------------
Shareholders' equity:
Series A Convertible Preferred Stock.......... 2,710,725 --
Common stock.................................. 10,610,265 10,399,318
Additional paid-in capital.................... 3,902,994 4,133,640
Accumulated deficit........................... (13,085,690) (10,441,795)
------------ ------------
Total shareholders' equity............ 4,138,294 4,091,163
------------ ------------
Total liabilities and stockholders' equity $ 5,452,008 $ 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 MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Sales $ 159,817 $ 113,517
Cost of goods............................. 42,359 15,256
----------- ----------
Gross profit....................... 117,458 98,261
Operating expense:
Sales and marketing........................ 770,061 877
Research and development................... 941,326 80,468
General and administrative................. 1,074,167 454,246
----------- ----------
Loss from operations............... (2,668,096) (437,330)
Other income and expense
Interest income........................... 18,251 1,757
Interest expense.......................... (6,614) (34,422)
----------- ----------
Loss before taxes.................. (2,656,459) (469,995)
----------- ----------
Net loss before minority interest.......... (2,656,459) (469,995)
Minority interest in subsidiary net loss... 12,563 --
----------- ----------
Net loss...................... $(2,643,896) $ (469,995)
Accretion of Preferred Stock Discounts (215,800) --
----------- ----------
Net loss attributable to common shareholders. $(2,859,696) $ (469,995)
=========== ==========
Weighted average common shares outstanding... 5,041,391 3,158,904
Net loss per share........................... $ (0.57) $ (0.15)
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Cash flow from operating activities
Net loss................................................................... $(2,643,896) $ (469,995)
---------- ---------
Adjustments to reconcile net loss to net cash used in operating activities:
Minority interests in subsidiary net loss................................... (12,563) --
Depreciation............................................................... 100,734 15,827
Amortization............................................................... -- 2,614
Amortization of deferred finance cost....................................... -- 54,944
Operating expenses paid with issuance of common stock....................... 2,453 42,251
Interest expense added to note payable...................................... 2,416 11,917
Changes in assets and liabilities:
Decrease (increase) in accounts receivable............................... (193,370) (57,584)
Decrease (increase) in inventory......................................... (452) 10,192
Decrease (increase) in prepaid expenses.................................. 387,609 --
Decrease (increase) in other assets...................................... (54,771) (4,019)
Increase (decrease) in accounts payable.................................. (114,528) (341,769)
Increase (decrease) in accrued expenses.................................. (46,572) (233,379)
---------- ---------
Total adjustments................................................. 70,956 (499,006)
---------- ---------
Net cash used in operating activities............................. (2,572,940) (969,001)
---------- ---------
Cash flows used in investing activities:
Purchase of fixed assets.................................................... (232,553) (26,241)
---------- ---------
Net cash provided by (used in) investing activities............... (232,553) (26,241)
---------- ---------
Cash flows from financing activities:
Net proceeds from borrowings.................................... -- 288,377
Principal payments on notes payable......................................... (70,588) (48,692)
Principal payments on capital leases........................................ (7,206) --
Issuance of common stock.................................................... 120,246 4,702,824
Issuance of Preferred Stock, net of offering costs and discounts............ 2,494,925 --
---------- ---------
Net cash provided by financing activities................................ 2,537,377 4,942,509
---------- ---------
Net increase (decrease) in cash and cash equivalents.......................... (268,116) 3,947,267
Cash and cash equivalents at beginning of quarter............................. 3,166,657 178,340
---------- ---------
Cash and cash equivalents at end of quarter................................... 2,898,541 4,125,607
========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
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, 1997 and 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:
March 31, 1997 December 31, 1996
-------------- -----------------
Raw materials and supplies $ 89,007 $ 88,555
Finished goods - ACS 85,286 85,286
-------- --------
$174,293 $173,841
======== ========
3. Costs and Expenses
------------------
Operating expenses for the three months ended March 31, 1997 increased
significantly from the first quarter of 1996. Increases in sales and marketing
expenses for 1997 resulted from the Company's participation in the Consumer
Electronics Show in Las Vegas in January 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 staffing levels, 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. According to the
agreement, 8% Cumulative Series A Preferred Stock is issuable at a 20% discount
from face value. The 20% discount is accreted 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. Remaining financings beyond the
first tranche are 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 face 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 the earlier of the date of effective
registration or 60 days from the closing date of the first tranche and is
automatically 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 March 31, 1997 and 1996, the Company issued
16,638 and 10,850 shares of common stock, respectively, in lieu of cash as
payment for legal fees and employee services of $85,703 and $42,251,
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.
-5-
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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 March 31, 1997 and 1996 are not materially different from the
EPS amount currently presented on the Company's Financial Statements herein.
-6-
<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 first 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 March 31, 1997,
Telegen had an accumulated deficit of $13,085,690. As of March 31, 1997 Telegen
has working capital of $2,469,430. 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.
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 first quarter of 1997 were $159,817, compared to
--------
$113,517 for the first quarter of 1996. 1997 revenues consisted primarily of
MSM revenues of $159,028 from software services under contract and product
sales. The remaining $789 of 1997 revenues consisted of product sales made by
Telegen Communications Corporation, a California corporation and wholly owned
subsidiary of Telegen ("TCC"). 1996 revenues consisted primarily of MSM
revenues of $101,889 from software services under contract. The remaining
$11,628 of 1996 revenues consisted of TCC product sales. Prior to 1996 all
revenues were derived from TCC product sales. TCC's Teleblocker product which
made up the bulk of prior revenues was taken off the market in June of 1995 for
redesign. The Company is redesigning the Teleblocker products and will return
them to the market in the spring of 1997.
Cost of Goods Sold. Cost of goods sold was $42,359 for the first quarter of
------------------
1997 and $15,256 for the first quarter of 1996. Cost of goods sold for the
first quarter of 1997 consisted of $41,836 for revenues derived from MSM and
$523 for revenues derived from TCC. Cost of goods sold for the first quarter of
1996 consisted of $5,243 for revenues derived from MSM and $10,013 for revenues
derived from TCC. Prior to 1996 all costs of goods sold was related to TCC
product sales.
Research and Development. Research and development expenses were $941,326 for
------------------------
the first quarter of 1997 and $80,468 for the first 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,
$654,149 were attributable to TDL, $81,755 were attributable to MSM and $205,422
were attributable to TCC. In the first quarter of 1996 all research and
development expenses were attributable to TCC.
Sales and Marketing. Sales and marketing expenses for the first quarter of
-------------------
1997 were $770,061 compared with $877 for the first quarter of 1996. Of the
1997 sales and marketing expenses, $514,620 was attributable to TDL, $14,525 was
attributable to MSM, and $240,916 was attributable to TCC and Telegen
Corporation. In the first quarter of 1996 all sales and marketing expenses were
attributable to TCC. Approximately 86% of the sales and marketing expenses for
the first
-7-
<PAGE>
quarter of 1997 attributable to TDL and TCC were related to participation in the
Consumer Electronics Show in Las Vegas in January of 1997. Increases in sales
and marketing expenses for TCC for 1997 not related to the Consumer Electronics
Show 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 first
--------------------------
quarter of 1997 were $1,074,167 as compared with $454,246 for the first quarter
of 1996. Of the 1997 general and administrative expenses $143,890 were
attributable to TDL, $191,957 were attributable to MSM and $738,320 were
attributable to TCC and Telegen Corporation. Of the 1996 general and
administrative expenses none were attributable to TDL, $93,712 were attributable
to MSM and $360,534 were attributable to TCC and Telegen Corporation. The
increase in general and administrative expenses not related to TDL or MSM for
1997 as compared to 1996 were related to legal and consulting fees associated
with patent activity and compliance with SEC reporting requirements, increased
staffing and the relocation of Telegen to a new and larger facility.
Interest Income and Expenses. Net interest income for the first quarter of
----------------------------
1997 was $11,637 as compared with net interest expense of $32,665 for the first
quarter of 1996. Of the 1997 interest income and expense TDL contributed
$14,898 of interest income and no interest expense, MSM contributed no interest
income and $3,675 of interest expense, and TCC and Telegen Corporation
contributed $3,353 of interest income and $2,939 of interest expense. In the
first quarter of 1996 all interest income and expense were attributable to TCC
and Telegen Corporation. Increases in interest income for 1997 for TDL and
TCC/Telegen Corporation were the result of increased interest bearing deposits
on account following private placements of stock. Interest expenses for TCC and
Telegen Corporation for the first 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 April 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 March 31,
1997, Telegen had raised $10,610,265 in net capital through the sale of Telegen
common stock, $2,494,925 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 which will result in
$3.6 million in net proceeds to Telegen, of which $2.5 million was received in
March, 1997.
Due to the unavailability of cash resources for operations, Telegen issued
16,638 shares of common stock and 10,850 shares of common stock during the first
quarter of 1997 and 1996, respectively, in lieu of cash as payment for certain
operating expenses, primarily legal fees and employees services, amounting to
$85,703 and $42,251, respectively.
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, scheduled funding of Series A Preferred
Stock, and revenues from operations will be adequate to meet Telegen's cash
requirements for at least the next 12 months. Telegen's current commitments for
capital expenditures is related to the purchase of equipment which is required
to establish a laboratory for its subsidiary TDL and a limited, prototype
production line for the TDL flatpanel display. TDL will require significant
additional capital to move into a manufacturing phase. The total amount of funds
expected to be required to build that limited production line is approximately
$5 million.
-8-
<PAGE>
Telegen's actual working capital needs will depend upon numerous factors
including the progress of Telegen's research and development activities, the
cost of increasing Telegen's sales, marketing and manufacturing activities and
the amount of revenues generated from operations, none of which can be
predicted with certainty. Therefore, there can be no assurance that Telegen
will not require additional equity or debt financing within the next twelve
months.
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 its
products and has incurred significant operating losses in every fiscal year
since its inception. The cumulative net operating loss for the period from
inception through March 31, 1997 was $13,085,690. 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 needs for at least the next 12 months, 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 high volume production
capability. There can be no assurance that any additional financing will be
available to Telegen on acceptable terms, if at all. If adequate funds are not
available as required, Telegen's results of operations from the flat panel
technology will be materially adversely affected.
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
-9-
<PAGE>
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.
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.
-10-
<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 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
-11-
<PAGE>
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 was
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.
-12-
<PAGE>
PART II. OTHER INFORMATION
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 first tranche closing in two parts:
(i) $3,500,000 in stated value of the Series A Preferred Stock and (ii) an
additional $1,500,000 in stated value upon the effective date of a registration
statement (the "Registration Statement") which is required to be filed
immediately upon the closing of the first tranche, to permit the sale of shares
of common stock issuable upon conversion of the Series A Preferred Stock. 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.
At the closing of each tranche, Telegen will issue four-year warrants to
purchase an aggregate amount of twenty percent (20%) of the purchase price of
the preferred stock.
The Series A Preferred may be converted into Telegen common stock, at any time
after the earlier of the effective date of the Registration Statement or sixty
(60) days after the closing date of the first tranche, 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.
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 March 31, 1997.
-13-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. EXHIBIT TITLE
---------- ---------------------------------------------------------
3.1* Articles of the Registrant
3.2* Bylaws of the Registrant
4.1** Subscription Agreement for Series A Preferred Stock
11.1*** Statements Re Computation Per Share Earnings
27.1 Financial Disclosure Schedule
(b) REPORTS OF FORM 8-K
The folllowing is a list of Current Reports on Form 8-K filed by the
Registrant during the quarter ended March 31, 1997:
1. 8-K filed on January 15, 1997 to report the Registrant's acquisition
of Morning Star Multimedia, Inc., a New Jersey corporation;
2. 8-K filed on January 21, 1997 to report that the Chief Executive
Officer positions of the Registrant's subsidiaries Telegen
Communications Corporation, a California corporation, and Telegen
Display Laboratories, Inc., a California corporation, became vacant;
3. 8-K filed on February 7, 1997 to report the Registrant's financial
results for its year and fourth quarter end December 31, 1996;
4. 8-K filed on March 14, 1997 to report that filing of audited
financial statements of Morning Star Multimedia, Inc., a New Jersey
corporation, and related pro forma information is not required under
Regulation S-X;
5. 8-K filed on March 25, 1997 to report the Registrant's sale of up to
$15,000,0000 in Series A Preferred Stock.
- ----------------------------
* 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 in this Form 10-Q in Note 7 to Part 1 Item 1 Financial
Statements.
-14-
<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 Santa Clara, California.
TELEGEN CORPORATION
Date: May 15, 1997 By: /s/ Warren M. Dillard
----------------------
Warren M. Dillard
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and Accounting
Officer)
-15-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-Q for the quarterly period ended March 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,898,541
<SECURITIES> 0
<RECEIVABLES> 459,856
<ALLOWANCES> 0
<INVENTORY> 174,293
<CURRENT-ASSETS> 3,532,690
<PP&E> 1,796,193
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,452,008
<CURRENT-LIABILITIES> 1,063,261
<BONDS> 0
0
2,710,725
<COMMON> 10,610,265
<OTHER-SE> (9,182,696)
<TOTAL-LIABILITY-AND-EQUITY> 5,452,008
<SALES> 159,817
<TOTAL-REVENUES> 159,817
<CGS> 42,359
<TOTAL-COSTS> 42,359
<OTHER-EXPENSES> (2,785,554)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,614
<INCOME-PRETAX> (2,656,459)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,643,896)
<EPS-PRIMARY> (0.57)
<EPS-DILUTED> (0.57)
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