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 JUNE 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
Commission file number: 0-21471
Telegen Corporation
(Exact name of registrant as specified in its charter)
California 84-0672714
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
101 Saginaw Drive
Redwood City, California 94063
(Address of principal executive offices, including zip code)
(650) 261-9400
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days.
YES |X| NO |_|
The number of issued and outstanding shares of the Registrant's Common
Stock as of June 30, 1998, was 12,044,743.
================================================================================
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of June 30, 1998 and December 31, 1997
(Unaudited)
<CAPTION>
(Unaudited)
June 30, December 31,
1998 1997
------------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 640 $ 275,891
Accounts receivable:
Trade, net of allowance for doubtful accounts of $66,000........... 2,298 --
Related parties, net of allowance for doubtful accounts of $6,753.. 629,076 213,121
Other.............................................................. -- 27,813
Inventory............................................................. -- 75,760
Prepaid expenses and other current assets............................. -- 17,664
------------------- -------------------
Total current assets.............................................. 632,014 610,249
Property and equipment, net.............................................. 1,230,214 1,546,183
Other assets............................................................. 98,477 75,182
------------------- -------------------
Total assets...................................................... 1,960,705 2,231,614
=================== ===================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable................................... 75,000 75,000
Accounts payable...................................................... 1,511,545 1,571,104
Accrued payroll and related taxes..................................... 882,164 964,046
Accrued expenses...................................................... 402,187 99,095
Deposit from tenants.................................................. 153,972 --
Deferred rent......................................................... 66,959 46,975
Dividend payable...................................................... 145,146 145,146
------------------- -------------------
Total current liabilities......................................... 3,236,973 2,901,366
Convertible notes payable................................................ 575,045 500,000
------------------- -------------------
Total liabilities................................................. 3,812,018 3,401,366
------------------- -------------------
Minority interests....................................................... -- --
Equity put options on common stock....................................... 300,000 300,000
Shareholders' equity (deficit):
Series A Convertible Preferred Stock.................................. -- --
Common stock.......................................................... 17,209,713 16,031,336
Additional paid-in capital............................................ 4,133,640 4,133,640
Accumulated deficit................................................... (23,494,666) (21,634,728)
------------------- -------------------
Total shareholders' (deficit) equity............................. (2,151,313) (1,469,752)
------------------- -------------------
Total liabilities and stockholders' equity............................ $ 1,960,705 $ 2,231,614
=================== ===================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the Three Months Ended June 30, 1998 and 1997
(Unaudited)
<CAPTION>
1998 1997
----------------- --------------------
<S> <C> <C>
Sales................................................................... $ -- $ 489,470
Cost of goods........................................................ -- 35,314
----------------- --------------------
Gross Profit.................................................... -- 454,156
Operating Expense:
Sales and marketing.................................................. -- 385,594
Research and development............................................. 334,557 1,324,808
General and administrative........................................... 934,906 2,024,040
----------------- --------------------
Loss from operations............................................ (1,269,463) (3,280,286)
Other income and expense
Interest income...................................................... 322 10,805
Interest expense..................................................... 17,008 3,011
----------------- --------------------
Loss before taxes................................................ (1,286,149) (3,272,492)
----------------- --------------------
Net loss before minority interest..................................... (1,286,149) (3,272,492)
Minority interest in subsidiary net loss.............................. -- 78,264
----------------- --------------------
Net loss......................................................... (1,286,149) (3,194,228)
Net loss before extraordinary gains and losses........................ (1,286,149) (3,194,228)
Extraordinary gain from sale of subsidiary assets..................... 510,244 --
----------------- --------------------
Net loss......................................................... (775,905) (3,194,228)
Accretion of Preferred Stock Discounts.................................. -- (484,275)
----------------- --------------------
Net loss attributable to common shareholders............................ $ (775,905) $ (3,678,503)
================= ====================
Net loss per common share:
Basic............................................................ $ (0.08) $ (0.71)
Diluted.......................................................... $ (0.08) $ (0.71)
Weighted average common shares outstanding.............................. 9,578,318 5,148,257
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the Six Months Ended June 30, 1998 and 1997
(Unaudited)
<CAPTION>
1998 1997
-------------------- ----------------------
<S> <C> <C>
Sales................................................................... $ 57,900 $ 649,286
Cost of goods........................................................ 24,578 69,820
-------------------- ----------------------
Gross Profit.................................................... 33,322 579,466
Operating Expense:
Sales and marketing.................................................. 19,408 1,157,238
Research and development............................................. 783,151 2,265,777
General and administrative........................................... 1,469,212 3,101,610
-------------------- ----------------------
Loss from operations............................................ (2,238,449) (5,945,159)
Other income and expense
Interest income...................................................... 323 29,056
Interest expense..................................................... 132,056 9,625
-------------------- ----------------------
Loss before taxes................................................ (2,370,182) (5,925,728)
-------------------- ----------------------
Net loss before minority interest..................................... (2,370,182) (5,925,728)
Minority interest in subsidiary net loss.............................. -- 90,827
-------------------- ----------------------
Net loss......................................................... (2,370,182) (5,834,901)
Net loss before extraordinary gains................................... (2,370,182) (5,834,901)
Extraordinary gain from sale of subsidiary assets..................... 510,244 --
-------------------- ----------------------
Net loss......................................................... (1,859,938) (5,834,901)
Accretion of Preferred Stock Discounts.................................. -- (700,075)
-------------------- ----------------------
Net loss attributable to common shareholders............................ $ (1,859,938) $ (6,534,976)
==================== ======================
Net loss per common share:
Basic............................................................ $ (0.21) $ (1.28)
Diluted.......................................................... $ (0.21) $ (1.28)
Weighted average common shares outstanding.............................. 8,661,930 5,094,824
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Six Months Ended June 30, 1998 and 1997
(Unaudited)
<CAPTION>
1998 1997
------------------ -------------------
<S> <C> <C>
Cash flow from operating activities
Net loss............................................................... $ (1,859,938) $ (5,834,901)
Adjustments to reconcile net loss to net cash used in operating activities:
Minority interests in subsidiary net loss............................... -- (90,827)
Depreciation.......................................................... 201,790 206,881
Amortization of deferred finance cost................................... 95,000 --
Operating expenses paid with issuance of common stock................... 6,000 113,139
Interest expense added to note payable.................................. -- 4,833
Changes in assets and liabilities:
Decrease (increase) in accounts receivable.......................... (390,440) (1,028,196)
Decrease (increase) in inventory.................................... 75,760 22,561
Decrease (increase) in prepaid expenses............................. 17,664 387,609
Decrease (increase) in other assets................................. (23,295) (49,346)
Increase (decrease) in accounts payable............................. (59,559) 448,967
Increase (decrease) in accrued expenses............................. 395,166 (17,341)
------------------ -------------------
Total adjustments.............................................. 318,086 (1,720)
------------------ -------------------
Net cash used in operating activities.......................... (1,541,852) (5,836,621)
------------------ -------------------
Cash flows used in investing activities:
(Purchase) sale of fixed assets..................................... 114,179 (396,798)
------------------ -------------------
Net cash provided by (used in) investing activities............ 114,179 (396,798)
------------------ -------------------
Cash flows from financing activities:
Net proceeds from borrowings................................... 75,045 --
Principal payments on notes payable................................. -- (88,178)
Principal payments on capital leases................................ -- (11,931)
Issuance of common stock............................................ 1,077,377 214,304
Issuance of preferred stock, net of offering costs and discounts.... -- 3,574,925
------------------ -------------------
Net cash provided by financing activities...................... 1,152,422 3,689,120
------------------ -------------------
Net increase (decrease) in cash and cash equivalents..................... (275,251) (2,544,299)
Cash and cash equivalents at beginning of quarter........................ 275,891 3,166,657
------------------ -------------------
Cash and cash equivalents at end of quarter.............................. 640 622,358
================== ===================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
5
<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, 1998 and 1997 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. The
accompanying consolidated balance sheet as of December 31, 1997 has been derived
from the audited financial statements, but does not include all disclosures
required by generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
The Company has incurred operating losses, has had negative cash flows from
operations and has a deficit shareholder's equity. The Company is currently
experiencing severe cash flow problems. The Company has deferred the payment of
wages to key management and is delinquent in paying certain amounts in the state
and federal wage withholding taxes and social security taxes for 1997. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments relating
to the recoverability of assets and classification of liabilities that might
result from the outcome of this uncertainty.
Management has taken steps to reduce administrative overhead which
include significant payroll reduction and subletting space.
In addition, the Company is currently seeking debt and equity financing
to support its product development, manufacturing and marketing efforts. There
can be no assurance that the Company's efforts described above will be
successful.
2. Inventory
<TABLE>
Inventory consists of the following:
<CAPTION>
June 30, 1998 December 31, 1997
------------------------------------------------------
<S> <C> <C>
Raw materials and supplies 0 75,760
Finished goods - ACS 0 0
------------------------------------------------------
0 75,760
</TABLE>
3. Costs and Expenses
Operating expenses for the three months ended June 30, 1998 decreased
significantly from the second quarter of 1997. The elimination of expenses from
Morning Star Multimedia Inc. ("MSM") due to the Company's sale of this
subsidiary on December 31, 1997 and the elimination of expenses from Telegen
Communications Corporation ("TCC") due to the Company's sale of the assets of
this subsidiary on April 1, 1998 resulted in decreases in all areas of operating
expenses for 1998. The decrease in general and administrative expenses also
resulted from decreased legal, accounting, and consulting fees as well as
reduced staffing at the Company.
During the second quarter of 1998, the Company became liable for a
judgment related to a contractor who had performed services for the Company in
connection with the Consumer Electronics Show in 1997. General and
administrative expenses for the second quarter includes $186,152, the amount by
which that judgment exceeded the liability previously recorded on the Company's
books for this contractor.
6
<PAGE>
4. Shareholder's Equity
In March and April of 1998, certain of the holders of 1,534,293
unregistered shares of the Company's Common Stock entered into an exchange
agreement whereby they exchanged their shares for one year convertible notes
bearing interest at the rate of six percent (6%) per annum, such exchange rate
being at the average of the closing market prices of five trading days of the
Common Stock as reported on the Electronic Bulletin Board prior to March 17,
1998, with the notes having convertibility back into Common Stock at the same
rate. The face value of convertible notes issued under this exchange agreement
as of June 30, 1998 was $127,045. Under the terms of such convertible notes, the
holders thereof can convert such notes to 284,296 shares of Common Stock of the
Company.
5. Supplemental Disclosure of Non-Cash Investing and Financing Activities
During the three months ended June 30, 1998 and 1997, the Company
issued 0 and 19,652 shares of common stock, respectively, in lieu of cash as
payment for legal fees and employee services of $0 and $110,686 respectively.
6. Contingencies
On January 7, 1998, IPC Corporation, Ltd., Transtech Electronics Pte.
Ltd., and IPC Transtech Display Pte. Ltd. (the "Plaintiffs") filed an action
(the "Complaint") in San Mateo County Superior Court against the Company,
Telegen Display Laboratories, Inc. ("TDL") and certain former officers and/or
directors of the Company. Plaintiffs allege that defendants made false and
misleading statements to the Plaintiffs when the Company sold TDL common stock
for $5,000,000 to the Plaintiffs on or about May 30, 1996. The Complaint alleges
violations of Cal. Corp. Code ss.ss. 25401, 25501, fraud and deceit and
negligent misrepresentation. It seeks rescission of the purchase of TDL common
stock and restitution of $5,000,000, unspecified compensatory and punitive
damages, interest, costs and attorneys' fees. On May 18, 1998, the Company and
the other defendants removed this action to the United States District Court for
the Northern District of California. On July 7, 1998, the Company and the other
defendants filed a motion to compel arbitration and stay action pending
arbitration and the Plaintiffs filed a motion for remand to state court. Both of
these motions presently are scheduled to be heard by the court on September 22,
1998. The Company believes the Complaint is without merit and intends to defend
such matter vigorously. To the extent the Plaintiffs were to succeed in this
matter, Telegen's results of operations and financial condition would be
materially adversely affected.
The Company is also 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 Pronouncements
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income,
and SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting comprehensive
income and has been applied in the six months ended June 30, 1998.
SFAS No. 131 establishes standards for annual and interim disclosures
of operating segments, products and services, geographic areas and major
customers. SFAS No. 131 is effective in 1998 for annual disclosures only;
interim disclosures will be required in 1999. The Company is in the process of
evaluating the disclosure requirements of SFAS No. 131, the adoption of which
will have no impact on the Company's results of operations or financial
condition.
8. Earnings Per Share
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations under SFAS No. 128 is as follows for the
3 months ended June 30, 1998:
7
<PAGE>
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
<S> <C> <C>
Loss attributable to common shareholders:
Net loss $ (755,905) $(3,194,228)
Reconciling item:
Accretion of preferred stock discount -- (484,275)
---------------------- ----------------------
Loss attributable to common shareholders: $ (755,905) $(3,678,503)
---------------------- ----------------------
Weighted average common shares
Outstanding for determination of:
Basic earnings per share 9,578,318 5,148,257
Diluted earnings per share 9,578,318 5,148,257
---------------------- ----------------------
Basic earnings per share (0.08) (0.71)
Diluted earnings per share (0.08) (0.71)
---------------------- ----------------------
</TABLE>
9. Extraordinary Gain from Sale of Subsidiary Assets
On April 1, 1998, the Company sold substantially all of its assets in
TCC. In consideration for such sale, the Company received (i) $350,000 in cash,
(ii) $150,000 in a promissory note, (iii) certain future royalties, and (iv)
certain TCC liabilities totaling $222,726 were assumed by the purchasing entity.
The extraordinary gain on the sale of the TCC assets represents the sum of (i)
the aggregate gains or losses arising from the allocation of the total
consideration received by the Company, as described above, to the book value of
the assets on the Company's books and records, and (ii) the Company's
liabilities assumed by TCC thereunder.
10. Year 2000 Compliance Risks
The Company is aware of the issues associated with the programming code
in existing computer systems and software products as the millennium (Year 2000)
approaches. The "Year 2000" problem is pervasive and complex, as virtually every
computer operation will be affected in the same way by the rollover of the two
digit year value to 00. The issue is whether computer systems will properly
recognize date-sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous data or
cause a system to fail. As a result, many companies' software, computer systems
and other equipment may need to be upgraded or replaced in order to comply with
such "Year 2000" requirements. The Company is utilizing both internal and
external resources to identify, correct or reprogram, and test its systems for
Year 2000 compliance. The Company uses off-the-shelf products for its internal
systems and expects to use products that are Year 2000 compliant by December 31,
1999, including and allowing adequate time for testing. However, there can be no
assurance that such off-the-shelf products on which the Company's systems rely
will also be available in a timely manner. Although preliminary estimates
indicate that the Year 2000 issue will not have a material impact on the
Company, there can be no assurance that the Year 2000 issue, due to the above
factors or other unforeseen consequences, will not have a material adverse
effect on the company's business, financial condition and operating results.
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
8
<PAGE>
discussion should be read in conjunction with the Company's Financial Statements
and Notes thereto included elsewhere in this report.
Duringthe second quarter of 1998, Telegen Corporation had no operating
revenues. During the second quarter of 1997, revenues were derived primarily
from the operations of Telegen Communications Corporation, a California
Corporation ("TCC") and wholly owned subsidiary of Telegen. On April 1, 1998,
the Company sold substantially all of its assets in TCC. In consideration for
such sale, the Company received (i) $350,000 in cash, (ii) $150,000 in a
promissory note, (iii) certain future royalties, and (iv) certain TCC
liabilities totaling $222,726 were assumed by the purchasing entity. Additional
revenues for the second quarter of 1997 were derived from Morning Star
Multimedia Inc., a New Jersey Corporation ("MSM") and wholly-owned subsidiary of
Telegen which was sold on December 31, 1997. The Company derived no revenues in
either 1998 or 1997 from Telegen Display Laboratories, Inc, ("TDL") a California
Corporation and a controlled second tier subsidiary of the Company.
Telegen has incurred significant operating losses in every fiscal year
since its inception, and, as of June 30, 1998, Telegen has an accumulated
deficit of $23,494,666. Telegen expects to continue to incur substantial
operating losses through 1998. In order to become profitable Telegen must
successfully develop commercial products, manage its operating expenses,
establish manufacturing capabilities, create sales for its products, and create
a distribution capability.
Telegen has made significant expenditures for research and development
of its products. In order to become 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
development of a revenue base.
Results of Operations
Revenues. Revenues for the second quarter of 1998 were $0 compared to
$489,470 for the second quarter of 1997. 1997 second quarter revenues consisted
primarily of TCC revenues of $400,520 of which approximately $300,000 was final
payment under a contract TCC entered into with MCI. The remaining $88,950 of
1997 revenues consisted of MSM revenues from software services under contract
and product sales
Cost of Goods Sold. Cost of goods sold was $0 for the second quarter of
1998 and $35,314 for the second quarter of 1997. 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.
Research and Development. Research and development expenses were
$334,557 for the second quarter of 1998 and $1,324,808 for the second quarter of
1997. All of the 1998 research and development expenses were attributable to
TDL. 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.
Decreases in research and development expenses for 1998 versus 1997 were the
result of cost cutting measures at TDL and the elimination of expenses
attributable to MSM and TCC.
Sales and Marketing. Sales and marketing expenses for the second
quarter of 1998 were $0 compared with $385,594 for the second quarter of 1997.
Telegen Corporation and TDL had no sales and marketing expense in the second
quarter of 1998. Of the second quarter of 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. 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
1997.
General and Administrative. General and Administrative expenses for the
second quarter of 1998 were $934,906 as compared with $2,024,040 for the second
quarter of 1997. Of the 1998 general and administrative expenses $42,314 were
attributable to TDL and $892,592 were attributable to Telegen Corporation. 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. The decrease in general and administrative expenses
attributable to TDL in 1998 primarily resulted from decreases in legal,
accounting and consulting fees. The decrease in general and administrative
expenses attributable to Telegen in 1998 resulted from decreases in legal,
accounting and consulting fees, as well as reduced staffing and the elimination
of TCC.
During the second quarter of 1998, the Company became liable for a
judgment related to a contractor who had performed services for the Company in
connection with the Consumer ELectronics Show in 1997. General and
administrative expenses for the second quarter includes $186,152, the amount by
which that judgment exceeded the liability previously recorded on the Company's
books for this contractor.
Interest Income and Expense. Net interest expense for the second
quarter of 1998 was $16,686 as compared with net interest income of $7,794 for
the second quarter of 1997. Of the 1998 interest income and expense, TDL
contributed $2 of interest income and $4,118 of interest expense and Telegen
Corporation contributed $320 of interest income and $12,890 of interest expense.
Of the 1997 interest income and expense TDL contributed $3,766 of interest
9
<PAGE>
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. Decreases in interest income for 1998 for
TDL and Telegen Corporation were the result of decreased interest bearing
deposits on account.
Liquidity and Capital Resources
Telegen has funded its operations primarily through private placements
of its equity securities with individuals and institutional investors. As of
June 30, 1998, Telegen had raised $17,209,713 in net capital through the sale of
Telegen Common Stock, and $4,133,640 in net capital through the sale TDL common
stock.
Due to the limited availability of cash resources for operations,
Telegen issued 0 shares of common stock and 19,652 shares of common stock during
the second quarter of 1998 and 1997, respectively, in lieu of cash as payment
for certain operating expenses, primarily legal fees and employee services
amounting to $0 and $110,686, respectively.
Telegen's current working capital is very limited. The Company has a
very limited amount of readily available funds to cover immediate working
capital needs such as employee wages, wage taxes, social security taxes, and
lease payments. Furthermore, the Company currently has tax debts associated with
federal and state wage withholding taxes and social security taxes in the amount
of $350,000. Under the Agreement to sell the assets of TCC, the purchasers of
TCC assumed $100,000 of such liabilities. To meet such immediate working capital
needs, the Company will need to raise immediate funds, whether through the sale
of the Company's assets or through attracting immediate financing. There can be
no assurance that the Company will be able to obtain such funding on acceptable
terms, or if at all, to meet its immediate capital demands. If adequate funds
are not available as required, Telegen will not be able to continue operations.
Assuming Telegen can obtain adequate short-term capital to continue its
operations, 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. Additionally, Telegen's general
working capital needs will depend on numerous factors, including the progress of
Telegen's research and development activities, the cost of generating new sales,
marketing and manufacturing activities for TDL and the amount of revenues
generated from TDL operations. To meet the Company's capital requirements,
Telegen will need to obtain significant additional funding through 1998 and
there can be no assurance that Telegen will be able to obtain such funding or
that any additional funding will be available to Telegen on acceptable terms, if
at all, to meet its capital demands through 1998. If adequate funds are not
available as required, Telegen's results of operations will be materially
adversely affected. Telegen believes it requires substantial capital to complete
development of a finished prototype of the flat panel display technology, and
that additional capital will be needed to establish a high volume production
capability. If adequate funds are not available as required, Telegen's results
of operations from the flat panel technology will be materially adversely
affected.
Telegen does not have a final estimate of cost nor does Telegen have
the funds available to build a full-scale production plant for the flat panel
display and will not be able to build this plant without securing significant
additional capital. Telegen plans to secure these funds either (1) from a large
joint venture partner who would then be a co-owner of the plant or (2) through a
future public or private offering of stock. Even if such funding can be
obtained, which cannot be assured, it is currently estimated that a full-scale
production plant could not be completed and producing significant numbers of
flat panel displays before late 1999. However, Telegen is currently
contemplating entering into licensing agreements with large enterprises to
manufacture the displays. The licensed manufacturers would also have established
manufacturing expertise, distribution channels to assure a ready market for the
displays and established reputations, potentially enhancing market acceptance.
Further, Telegen would benefit from front-end license fees plus ongoing
royalties for income. However, Telegen does not currently expect to have any
such manufacturing license agreements in place before the end of 1998, or any
significant production of displays thereunder before late 1999.
Telegen's future capital infusions will depend entirely on its ability
to attract new investment capital based on the appeal of the inherent attributes
of its technology and the belief that such technology can be developed and taken
to profitable manufacturing in the foreseeable future. Efforts are currently
being made with parties with substantial resources to conclude such capital
formation. Such capital formation efforts are intended to infuse $20 million
over a period of two (2) years, including $5 million for a prototype plant.
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.
10
<PAGE>
Telegen anticipates incurring substantial costs for research and
development and for sales and marketing activities in 1998. Management believes
that development of commercial products, an active marketing program and a
significant field sales force are essential for Telegen's long-term success.
Telegen estimates that its total expenditures for research and development and
related equipment and overhead costs will aggregate over $4,000,000 during 1998.
Telegen estimates that its total expenditures for general and administrative and
sales and marketing efforts will aggregate over $1,000,000 during 1998. Almost
none of such funds outlined above are presently available to Telegen.
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:
Telegen's Capital Needs
Telegen's current working capital is very limited. The Company has a
limited amount of readily available funds to cover immediate working capital
needs such as employee wages, wage taxes, social security taxes, and lease
payments. There can be no assurance that the Company will be able to obtain such
funding on acceptable terms, or if at all to meet its immediate capital demands.
If adequate funds are not available as required, Telegen will not be able to
continue operations. In connection with the Company's financial condition, the
Company's independent accountants have included in their report for the
financial statements for the fiscal year end 1997 an explanatory paragraph
related to the Company's ability to continue as a going concern.
Assuming Telegen can obtain adequate short-term capital, 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. Additionally, Telegen's general 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. Although Telegen believes it will obtain additional funding through
1998, there can be no assurance that Telegen will be able to obtain such funding
or that if it does obtain such funding, it will not require additional funding,
or that any such funding will be available to Telegen on acceptable terms, if at
all, to meet its capital demands through 1998. If adequate funds are not
available as required, Telegen's results of operations will be materially
adversely affected. Telegen believes it requires substantial capital to complete
development of a finished prototype of its flat panel display technology, and
that 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.
History of Telegen Operating Losses; Accumulated Deficit and Minimum Revenues
Telegen's predecessor, Telegen Communications Corporation ("TCC"), was
incorporated in 1990 and first shipped products in 1991. Telegen has been
engaged in lengthy development of its products and has incurred significant
operating losses in every fiscal year since its inception. The cumulative net
loss for the period from inception through June 30, 1998 was $23,494,666. In
order to become profitable, Telegen must increase sales of its existing
products, develop, commercialize and sustain volume manufacturing of its flat
panel products, develop new products for new and existing markets, manage its
operating expenses and expand its distribution capability. There can be no
assurance that Telegen will meet and realize these objectives or ever achieve
profitability.
Litigation
On January 7, 1998, IPC Corporation, Ltd., Transtech Electronics Pte.
Ltd., and IPC Transtech Display Pte. Ltd. (the "Plaintiffs") filed an action
(the "Complaint") in San Mateo County Superior Court against the Company,
Telegen Display Laboratories, Inc. ("TDL") and certain former officers and/or
directors of the Company. Plaintiffs allege that defendants made false and
misleading statements to the Plaintiffs when the Company sold TDL common stock
for $5,000,000 to the Plaintiffs on or about May 30, 1996. The Complaint alleges
violations of Cal. Corp. Code ss.ss. 25401, 25501, fraud and deceit and
negligent misrepresentation. It seeks rescission of the purchase of TDL common
stock and restitution of $5,000,000, unspecified compensatory and punitive
damages, interest, costs and attorneys' fees. On May 18, 1998, the Company and
the other defendants removed this action to the United States District Court for
the Northern District of California. On July 7, 1998, the Company and the other
defendants filed a motion to compel arbitration and stay action pending
arbitration and the Plaintiffs filed a motion for remand to state court. Both of
these
11
<PAGE>
motions presently are scheduled to be heard by the court on September 22, 1998.
The Company believes the Complaint is without merit and intends to defend such
matter vigorously. To the extent the Plaintiffs were to succeed in this matter,
Telegen's results of operations and financial condition would be materially
adversely affected.
Telegen's Exposure to Technological and Market Change; Difficulty in Developing
Flat Panel Technology
The market for Telegen's products is characterized by rapid
technological change and evolving industry standards and is highly competitive
with respect to timely product innovation. The introduction of products
embodying new technology and the emergence of new industry standards can render
existing products obsolete and unmarketable. Telegen's success will be dependent
in part upon its ability to anticipate changes in technology and industry
standards and to successfully develop and introduce new and enhanced products on
a timely basis. If Telegen is unable to do so, Telegen's results of operations
will be materially adversely affected.
With regard to its flat panel display technology, there are other more
developed and accepted flat panel display technologies already in commercial
production which will compete with Telegen's technology. The Company has not
finished the development of a completed prototype of the HGED flat panel display
technology. The Company believes it can successfully scale its HGED flat panel
display technology to 10.5 inch diagonal displays. At present, the Company does
not believe that scalability of this generation of its technology beyond such
levels is feasible. However, the Company does have preliminary design concepts
for a second generation of its technology which might provide additional
scalability. There can be no assurance that Telegen will be successful in the
development of its flat panel technology or that Telegen will not encounter
technical or other serious difficulties in its development, commercialization or
volume manufacturing which would be materially adverse to Telegen's results of
operations.
Telegen's Dependence Upon Key Personnel
Telegen's future success will depend in significant part upon the
continued service of certain key technical and senior management personnel, and
Telegen's ability to attract, assimilate and retain highly qualified technical,
managerial and sales and marketing personnel. Competition for such personnel is
intense, and there can be no assurance that Telegen can retain its existing key
managerial, technical or sales and marketing personnel or that it can attract,
assimilate and retain such employees in the future. The loss of key personnel or
the inability to hire, assimilate or retain qualified personnel in the future
could have a material adverse effect upon Telegen's results of operations.
Telegen has entered into agreements with each of its executive officers
(as well as all other full-time employees) that prohibit disclosure of
confidential information to anyone outside of Telegen both during and subsequent
to employment and require disclosure and assignment to Telegen of all
proprietary rights to any ideas, discoveries or inventions relating to or
resulting from the officer's work for Telegen.
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 ten
(10) years and have proven market acceptance. New technologies, such as FED and
Color Plasma, are in development by a number of potential competitors, some of
whom have greater financial resources than Telegen. Telegen does not own or
lease a manufacturing facility for, and has not begun the process of, volume
manufacturing of flat panel displays. There can be no assurance that Telegen's
HGED technology can compete successfully on a cost or display quality basis with
these other technologies. Further, there can be no assurance that Telegen's
efforts to obtain patent protection for its HGED technology will be successful
or, if patent protection is obtained, that Telegen's patent(s) will provide
adequate protection.
Telegen's 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
12
<PAGE>
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 technology and products. Such
protection, however, may not preclude competitors from developing products
similar to those of Telegen. In addition, the laws of certain foreign countries
do not protect Telegen's intellectual property rights to the same extent as do
the laws of the United States. There can also be no assurance that third parties
will not assert intellectual property infringement claims against Telegen. One
such matter was recently dismissed without prejudice to the Company but there is
no assurance that more claims will not be initiated from litigants with more
resources than Telegen. There is no assurance that Telegen will prevail in such
litigation seeking damages or an injunction against the sale of Telegen's
products or that Telegen will be able to obtain any necessary licenses on
reasonable terms or at all.
Listing of the Company's Stock on the OTC Bulletin Board
The Company currently trades its stock on the OTC Bulletin Board (the
"OTC BB"). The OTC BB is a real-time electronic quotation service for
over-the-counter securities. The OTC BB is not an automated quotation system and
is characterized by low volume of trading. There is no assurance that the OTC BB
can or will provide sufficient liquidity to holders of the Company's Common
Stock. The Company was trading on the Nasdaq SmallCap Market until January 22,
1998 and intends to return to it as soon as it meets the listing and maintenance
requirements. On February 22, 1998, Nasdaq raised such listing and maintenance
requirements. There can be no assurance that trading on the OTC BB will provide
investors with sufficient liquidity for the purchase and sale of the Common
Stock or that the Company will be able to meet the higher Nasdaq SmallCap Market
("SmallCap") listing and maintenance requirements that have been in effect since
February 22, 1998, in the near future, or if at all, or that if the Company does
meet the SmallCap requirements that a broad trading market will develop in the
Common Stock.
Year 2000 Compliance Risks
The Company is aware of the issues associated with the programming code
in existing computer systems and software products as the millennium (Year 2000)
approaches. The "Year 2000" problem is pervasive and complex, as virtually every
computer operation will be affected in the same way by the rollover of the two
digit year value to 00. The issue is whether computer systems will properly
recognize date-sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous data or
cause a system to fail. As a result, many companies' software, computer systems
and other equipment may need to be upgraded or replaced in order to comply with
such "Year 2000" requirements. The Company is utilizing both internal and
external resources to identify, correct or reprogram, and test its systems for
Year 2000 compliance. The Company uses off-the-shelf products for its internal
systems and expects to use products that are Year 2000 compliant by December 31,
1999, including and allowing adequate time for testing. However, there can be no
assurance that such off-the-shelf products on which the Company's systems rely
will also be available in a timely manner. Although preliminary estimates
indicate that the Year 2000 issue will not have a material impact on the
Company, there can be no assurance that the Year 2000 issue, due to the above
factors or other unforeseen consequences, will not have a material adverse
effect on the company's business, financial condition and operating results.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 7, 1998, IPC Corporation, Ltd., Transtech Electronics Pte.
Ltd., and IPC Transtech Display Pte. Ltd. (the "Plaintiffs") filed an action
(the "Complaint") in San Mateo County Superior Court against the Company,
Telegen Display Laboratories, Inc. ("TDL") and certain former officers and/or
directors of the Company. Plaintiffs allege that defendants made false and
misleading statements to the Plaintiffs when the Company sold TDL common stock
for $5,000,000 to the Plaintiffs on or about May 30, 1996. The Complaint alleges
violations of Cal. Corp. Code ss.ss. 25401, 25501, fraud and deceit and
negligent misrepresentation. It seeks rescission of the purchase of TDL common
stock and restitution of $5,000,000, unspecified compensatory and punitive
damages, interest, costs and attorneys' fees. On May 18, 1998, the Company and
the other defendants removed this action to the United States District Court for
the Northern District of California. On July 7, 1998, the Company and the other
defendants filed a motion to compel arbitration and stay action pending
arbitration and the Plaintiffs filed a motion for remand to state court. Both of
these motions presently are scheduled to be heard by the court on September 22,
1998. The Company believes the Complaint is without merit and intends to defend
such matter vigorously. To the extent the Plaintiffs were to succeed in this
matter, Telegen's results of operations and financial condition would be
materially adversely affected.
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits
Exhibit
No. Exhibit Title
- ------------ ------------------------------------------------------------------
2.2* Asset Purchase of TCC Agreement by and between Synercom, Inc. and
Telegen Corporation dated April 1, 1997
3.1+ Articles of Incorporation of Telegen Corporation dated August 29,
1996 [formerly known as Solar Energy Research Corp.]
3.2+ Certificate of Amendment to Articles of Incorporation of Telegen
Corporation dated September 25, 1996 [formerly known as Solar
Energy Research Corp.]
3.3++ Certificate of Determination with respect to the Company's
outstanding Series A Preferred Stock filed with the California
Secretary of State March 20, 1997
3.4+ Bylaws of Telegen Corporation
3.5* Certificate of Amendment of Bylaws effective August 6, 1997
4.3** Form of Convertible Promissory Note issued by the Company to the
investors and to a placement agent for the Note and Warrant
Financing initiated on April 1, 1998
4.4** Form of $0.38 Warrant to purchase Common Stock issued by the
Company to investors in the Note and Warrant Financing initiated
on April 1, 1998
4.5** Form of $0.38 Warrant to purchase Common Stock issued by the
Company to placement agents for the Note and Warrant Financing
initiated on April 1, 1998
4.6** Form of Convertible Promissory Note issued to Nevada Anderson
pursuant to that certain Satisfaction and Release Agreement dated
May 5, 1998
11.1*** Statements Re Computation per Share-Earnings
27.1 Financial Data Schedule
- ------------------------
* Incorporated by reference to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 filed by the Company on April 15, 1998 and
Amended on April 30, 1998.
** Incorporated by reference to the Registration Statement on Form S-3 filed
by the Company on May 22, 1998 (File No. 333-53535).
*** Incorporated by reference to the Consolidated Statements of Operations and
Comprehensive Income Statement and the accompanying footnotes to the
financial statements herein.
+ Incorporated by reference to the Quarterly Report on Form 10-QSB filed by
the Company on November 12, 1996
++ Incorporated by reference to the 8-K filed by the Company on March 25,
1998
2. Reports on Form 8-K
The following Current Report on Form 8-K filed by the Registrant during
the quarter ended June 30, 1998:
1. 8-K filed on April 7, 1998 to report that the Registrant sold
all the assets of its wholly-owned subsidiary Telegen
Communications Corporation, a California corporation.
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.
TELEGEN CORPORATION
Date: August 14, 1998 By: /s/ Fred Kashkooli
------------------------------------------------
Fred Kashkooli
Chief Executive Officer
(Duly Authorized Officer and Principal Financial
and Accounting Officer)
15
<PAGE>
Exhibit Index
Exhibit
No. Description
- ------------ -----------------------------------------------------------------
27.1 Financial Data Schedule
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000906448
<NAME> Telegen Corporation
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