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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[x] 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 April 15, 1998, was 6,615,812.
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<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of March 31, 1998 and December 31, 1997
(Unaudited)
<CAPTION>
(Unaudited)
March 31, December 31,
1997 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 110,577 $ 275,891
Accounts receivable:
Trade, net of allowance for doubtful accounts of $66,000 ................ 15,975 --
Related parties, net of allowance for doubtful accounts of $6,753........ 225,398 213,121
Other.................................................................... -- 27,813
Inventory.................................................................. 53,106 75,760
Prepaid expenses and other current assets.................................. -- 17,664
------------ ------------
Total current assets..................................................... 405,056 610,249
Property and equipment, net.................................................. 1,445,701 1,546,183
Other assets................................................................. 98,477 75,182
------------ ------------
Total assets............................................................. $ 1,949,234 $ 2,231,614
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable........................................ $ 75,000 $ 75,000
Accounts payable........................................................... 1,635,925 1,571,104
Accrued payroll and related taxes.......................................... 977,094 964,046
Accrued expenses........................................................... 302,917 99,095
Deposit from tenants....................................................... 153,972 --
Deposit on sale of subsidiary.............................................. 350,000 --
Deferred rent.............................................................. 56,967 46,975
Dividend payable........................................................... 145,146 145,146
------------ ------------
Total current liabilities................................................ 3,697,021 2,901,366
Convertible notes payable.................................................... 1,174,466 500,000
------------ ------------
Total liabilities........................................................ 4,871,487 3,401,366
------------ ------------
Equity put options on common stock........................................... 300,000 300,000
------------ ------------
Shareholders' equity (deficit):
Series A Convertible Preferred Stock....................................... -- --
Common stock............................................................... 15,362,868 16,031,336
Additional paid-in capital................................................. 4,133,640 4,133,640
Accumulated deficit........................................................ (22,718,761) (21,634,728)
------------ ------------
Total shareholders' (deficit) equity..................................... (3,222,253) (1,469,752)
------------ ------------
Total liabilities and stockholders equity............................... $ 1,949,234 $ 2,231,614
============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the Three Months Ended March 31, 1998 and 1997
(Unaudited)
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Sales $ 57,900 $ 159,817
Cost of goods.............................................................. 24,578 42,359
------------ ------------
Gross profit............................................................. 33,322 117,458
Operating Expense:
Sales and marketing........................................................ 19,408 770,061
Research and development................................................... 448,594 941,326
General and administrative................................................. 534,307 1,074,167
------------ ------------
Loss from operations..................................................... (968,987) (2,668,096)
Other income and expense
Interest income............................................................ 2 18,251
Interest expense........................................................... 115,048 6,614
------------ ------------
Loss before taxes........................................................ (1,084,033) (2,656,459)
Income taxes ............................................................ -- --
------------ ------------
Net loss before minority interest.......................................... (1,084,033) (2,656,459)
Minority interest in subsidiary net loss................................... -- 12,563
------------ ------------
Net loss................................................................. $ (1,084,033) $ (2,643,896)
============ ============
Comprehensive Loss ...................................................... $ (1,084,033) $ (2,643,896)
============ ============
Net loss per common share:
Basic: .................................................................. (0.14) (0.57)
Diluted: ................................................................ (0.14) (0.57)
Weighted average common shares outstanding .................................. 7,958,928 5,041,391
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
TELEGEN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1998 and 1997
(Unaudited)
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flow from operating activities
Net loss ............................................................................... $(1,084,033) $(2,643,896)
Adjustments to reconcile net loss to net cash used in operating activities:
Minority interests in subsidiary net loss .............................................. -- (12,563)
Depreciation ........................................................................... 105,432 100,734
Amortization of deferred finance cost .................................................. 95,000 --
Operating expenses paid with issuance of common stock .................................. 6,000 2,453
Interest expense added to note payable ................................................. -- 2,416
Changes in assets and liabilities:
Decrease (increase) in accounts receivable ........................................... (440) (193,370)
Decrease (increase) in inventory ..................................................... 22,654 (452)
Decrease (increase) in prepaid expenses .............................................. 17,664 387,609
Decrease (increase) in other assets .................................................. (23,295) (54,771)
Increase (decrease) in accounts payable .............................................. 64,821 (114,528)
Increase (decrease) in accrued expenses .............................................. 635,833 (46,572)
----------- -----------
Total adjustments .................................................................. 923,669 70,956
----------- -----------
Net cash used in operating activities .............................................. (160,364) (2,572,940)
----------- -----------
Cash flows used in financing activities:
Purchase of fixed assets ............................................................... (4,950) (232,553)
----------- -----------
Net cash provided by (used in) investing activities ................................ (4,950) (232,553)
----------- -----------
Cash flows from financing activities:
Net proceeds from borrowings ........................................................... -- --
Principal payments on notes payable .................................................... -- (70,588)
Principal payments on capital leases ................................................... -- (7,206)
Issuance of common stock ............................................................... -- 120,246
Issuance of preferred stock, net of offering costs and discounts ....................... -- 2,494,925
----------- -----------
Net cash provided by financing activities ............................................ -- 2,537,377
----------- -----------
Net increase (decrease) in cash and cash equivalents ..................................... (165,314) (268,116)
Cash and cash equivalents at beginning of quarter ........................................ 275,891 3,166,657
----------- -----------
Cash and cash equivalents at end of quarter .............................................. $ 110,577 $ 2,898,541
=========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
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<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, 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 from 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.
As discussed in Note 8, the Company entered into an agreement with an
affiliate of the Company for the sale of substantially all of the assets
relating to the operating business of Telegen Communications Corporation, a
California corporation and the Company's telecommunications subsidiary ("TCC"),
for $500,000, royalty streams on certain TCC products for up to three years, and
assumption of certain liabilities.
Management has taken steps to reduce administrative overhead which
includes 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. In addition, there can be no assurance that the sale of
substantially all of the assets relating to the operating business of TCC or the
Company's financing efforts will produce the necessary cash flow required to
fund the Company's on-going operations.
2. Inventory
<TABLE>
Inventory consists of the following:
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Raw materials and supplies 17,129 75,760
Finished goods - ACS 35,977 0
-------- --------
53,106 75,760
======== ========
</TABLE>
3. Costs and Expenses
Operating expenses for the three months ended March 31, 1998 decreased
significantly from the first quarter of 1997. The elimination of expenses from
Morning Star Multimedia Inc. (MSM) due to the Company's sale of this subsidiary
at December 31, 1997 resulted in decreases in all areas of operating expenses
for 1998. Decreases in sales and marketing expenses for 1998 also resulted from
the Company's decision not to participate in the Consumer Electronics Show in
Las Vegas in January 1998. Decreases in research and development expenses for
1998 also resulted from decreased research and development activity at Telegen
Communications Corporation (TCC) a California corporation and wholly owned
subsidiary of the Company. The decrease in general and administrative expenses
also resulted from decreased legal, accounting, and consulting fees as well as
reduced staffing at the Company.
4. Shareholder's Equity
In March 1998, certain of the holders of 1,509,293 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 (6%) percent per annum, such exchange rate being 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 19, 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 March 31, 1998 was
$674,466. This reduced the number of shares outstanding at the end of March by
1,509,293 shares, but increased potential dilution through the issuance of
additional shares by a like amount and increased liabilities accordingly.
5. Supplemental Disclosure of Non-Cash Investing and Financing Activities
During the three months ended March 31, 1998 and 1997, the Company
issued 1,200 and 16,638 shares of Common Stock, respectively, in lieu of cash as
payment for legal fees and employee services of $6,000 and $85,703 respectively.
During March 1998, certain holders of 1,509,293 unregistered shares of the
Company's common stock exchanged their shares for on year convertible notes,
amounting to $674,466.
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 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. The Company and TDL recently were served
with the Complaint.
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.
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<PAGE>
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 was adopted during the three months ended March 31, 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. Subsequent Events:
Sale of Subsidiary:
On April 1, 1998, the Company entered into an agreement to sell
substantially all of the assets relating to the operating business of Telegen
Communications Corporation, a California corporation and the Company's
telecommunications subsidiary ("TCC"), to an affiliate of the Company for
$500,000 and the rights of royalty streams on certain TCC products for up to
three years. The buyer assumed certain liabilities totaling approximately
$223,000. The Company has received a deposit of $350,000 in cash as part of the
sale price. The remaining $150,000 will be paid in a note with six monthly
installments of $25,000 plus interest at 6% commencing on September 15, 1998.
The gain of $133,000 was calculated without regard to the $150,000 note
receivable and royalty rights and will be recorded in the second quarter of
1998.
Convertible Promissory Notes:
In April 1998, the Company initiated a private offering of convertible
promissory notes and warrants to purchase common stock to accredited investors
(the "Note and Warrant Investors") pursuant to certain Note and Warrant Purchase
Agreements (the "Agreements"). Under the terms of the Agreements, the Note and
Warrant Investors each received securities consisting of (i) a convertible
promissory note evidencing the respective amount of indebtedness and (ii) a
warrant to purchase a certain number of shares of the Company's common stock at
$.38 per share exercise price. The convertible promissory notes may be converted
into a number of shares of the Company's common stock equal to the face value of
the promissory note divided by $.38. The principal balance and accrued interest
at a rate of 6% are due March 31, 1999. The warrants expire in May 1998. As of
May 15, 1998, the Company sold two such convertible promissory notes with an
aggregate face amount of $1,015,532. The discounts resulting from the below
market conversion feature will be amortized to interest expense using the
interest method over 60 days, until the earliest conyersion date.
9. 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
three months ended March 31:
1998 1997
---- ----
Loss attributable to common shareholders:
Net loss $(1,084,033) $(2,643,896)
Reconciling item:
Accretion of preferred stock discount -- (215,800)
----------- ------------
Loss attributable to common shareholders $(1,084,033) $(2,859,696)
=========== ============
Weighted average common shares
outstanding for determination of:
Basic earnings per share 7,958,928 5,041,391
=========== ============
Diluted earnings per share 7,958,928 5,041,391
=========== ============
-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
AFactors 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 1998, revenues were derived entirely from
the operations of Telegen Communications Corporation, a California corporation
(TCC) and wholly owned subsidiary of Telegen. During the first quarter of 1997,
revenues were derived primarily 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 March 31, 1998, Telegen has an accumulated
deficit of $22,718,761. 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.
As a subsequent event, on April 1, 1998, the Company sold substantially
all of the assets relating to the operating business of TCC. In consideration
for such sale, the Company received (i) a total of $500,000, including $350,000
in cash, which had been received and was shown on the Company's Balance Sheet at
March 31, 1998 as Deposit on Sale of TCC, and $150,000 in a promissory note,
(ii) certain future royalties, and (iii) certain TCC liabilities were assumed by
the purchasing entity.
Results of Operations
Revenues. Revenues for the first quarter of 1998 were $57,900 compared
to $159,817 for the first quarter of 1997. 1998 first quarter revenues consisted
entirely of sales of TCC products and services. 1997 first quarter revenues
consisted primarily of MSM revenues of $159,028 from software services under
contract and product sales. The remaining $789 of 1997 revenues were derived
from TCC product sales.
Cost of Goods Sold. Cost of goods sold was $24,578 for the first
quarter of 1998 and $42,359 for the first quarter of 1997. Cost of goods sold
for the first quarter 1998 consisted entirely of costs related to revenues from
TCC. 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.
Research and Development. Research and development expenses were
$448,594 for the first quarter of 1998 and $941,326 for the first quarter of
1997. Of the 1998 research and development expenses, $391,254 were attributable
to TDL and $57,340 were attributable to 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. Decreases in research
and development expenses for 1998 versus 1997 were the result of cost cutting
measures at TDL, reduced research and development activity and cost cutting
measures at TCC, and the elimination of expenses due to the sale of MSM.
Sales and Marketing. Sales and marketing expenses for the first quarter
of 1998 were $19,408 compared with $770,061 for the first quarter of 1997. All
sales and marketing expenses for the first quarter of 1998 were attributable to
TCC and Telegen Corporation. Of the first quarter of 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. Approximately 86% of
the sales and marketing expenses for the first quarter of 1997 attributable to
TDL and TCC were related to participation in
-7-
<PAGE>
the Consumer Electronics Show in January 1997. Telegen did not participate in
the Consumer Electronics Show in January 1998 and TDL had no sales and marketing
expense in 1998.
General and Administrative. General and Administrative expenses for the
first quarter of 1998 were $534,307 as compared with $1,074,167 for the first
quarter of 1997. Of the 1998 general and administrative expenses $45,416 were
attributable to TDL and $488,890 were attributable to TCC and Telegen
Corporation. 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. 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 TCC and Telegen in 1998 resulted from
decreases in legal, accounting and consulting fees, as well as reduced staffing.
Interest Income and Expense. Net interest expense for the first quarter
of 1998 was $115,046 as compared with net interest income of $11,637 for the
first quarter of 1997. Of the 1998 interest income and expense, TDL contributed
$2 of interest income and $4,119 of interest expense and TCC and Telegen
Corporation contributed no interest income and $110,929 of interest expense. 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. Decreases in interest income for 1998 for
TDL and TCC and Telegen Corporation were the result of decreased interest
bearing deposits on account. Interest expenses for TCC and Telegen Corporation
for the first quarter of 1998 included $95,000 of amortization of the discount
related to the conversion feature on the $500,000 Convertible Promissory Notes
issued by Telegen in November 1997.
Liquidity and Capital Resources
Telegen has funded its operations primarily through private placements
of its equity securities with individuals and institutional investors. As of
March 31, 1998, Telegen had raised $15,362,868 in net capital through the sale
of Telegen Common Stock, and $4,133,640 in net capital through the sale of TDL
common stock.
Due to the limited availability of cash resources for operations,
Telegen issued 1,200 shares of common stock and 16,638 shares of common stock
during the first quarter of 1998 and 1997, respectively, in lieu of cash as
payment for certain operating expenses, primarily legal fees and employee
services amounting to $6,000 and $85,703, respectively.
Telegen's current liquid assets are 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. 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. Although Telegen believes it will obtain
significant additional funding through 1998, there can be no assurance that
Telegen will be able to obtain such funding or that it will not require
additional funding, or that any additional financing will be available to
Telegen on acceptable terms, or 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. 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.
-8-
<PAGE>
Telegen does not have a final estimate of cost nor 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 manufacturers
would also have the attributes of established manufacturing expertise,
distribution channels to assure a ready market for the displays and established
reputations, 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 June 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 that 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.
Telegen anticipates incurring substantial costs for research and
development, 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 significant additional funding through
1998, there can be no assurance that Telegen will be able to obtain such funding
or that it will not require additional funding, or that any additional financing
will be available to Telegen on acceptable terms, or 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.
-9-
<PAGE>
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 March 31, 1998 was $22,718,761. 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 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. The Company and TDL recently were served
with the Complaint. The Company believes that 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 result 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.
-10-
<PAGE>
Flat Panel Competition; Flat Panel Patent(s)
The market for flat panel displays is dominated by major Japanese
companies such as Sharp Electronics, Toshiba and Sony. Telegen expects this
competition to continually increase. There can be no assurance that Telegen will
be able to compete effectively against its competitors, many of whom may have
substantially greater financial resources than Telegen. Flat panel displays
manufactured utilizing AMLCD technology have been in production for almost 10
years and have proven market acceptance. New technologies, such as FED and Color
Plasma, are in development by a number of potential competitors, some of whom
have greater financial resources than Telegen. Telegen does not own or lease a
manufacturing facility for, and has not begun the process of, volume
manufacturing of flat panel displays. There can be no assurance that Telegen's
HGED technology can compete successfully on a cost or display quality basis with
these other technologies. Further, there can be no assurance that Telegen's
efforts to obtain patent protection for its HGED technology will be successful
or, if patent protection is obtained, that Telegen's patent(s) will provide
adequate protection.
Telegen's Dependence Upon Limited Number of Manufacturing Sources and Component
Suppliers
Telegen currently relies upon a limited number of manufacturing sources
for its telecom production capability. Although Telegen is currently seeking to
qualify alternative sources of supply, Telegen has not yet contracted for
alternative suppliers to perform such manufacturing activities. In the event of
an interruption of production or delivery of supplies, Telegen's ability to
deliver its products in a timely fashion would be compromised, which would be
materially adverse to Telegen's results of operations. Certain components used
in Telegen's telecommunications products, such as microprocessors, are available
from only a limited number of sources. Although to date Telegen has generally
been able to obtain adequate supplies of these components, Telegen obtains these
components on a purchase order basis and does not have long-term contracts with
any of these suppliers. In addition, some suppliers require that Telegen either
pre-pay the price of components being purchased or establish an irrevocable
letter of credit for the amount of the purchase. Telegen anticipates that, as it
begins manufacture of other products, it will encounter similar limitations
regarding the components for those products. Telegen's inability in the future
to obtain sufficient limited-source components for its telecommunications and
other products, or to develop alternative sources, could result in delays in
product introductions or shipments, which could have a material adverse effect
on Telegen's results of operations.
Telegen's Need to Develop Marketing Experience
Telegen has limited marketing experience, and expanding Telegen's
markets will require significant expenses, including additions to personnel.
There can be no assurance that Telegen will have all the capital resources
necessary to expand its sales and marketing operations, or that Telegen's
attempts to expand its sales and marketing efforts will be successful.
Intellectual Property
Telegen relies on a combination of patents, trade secret and other
intellectual property law, nondisclosure agreements and other protective
measures to preserve its rights pertaining to its products. Such protection,
however, may not preclude competitors from developing products similar to those
of Telegen. In addition, the laws of certain foreign countries do not protect
Telegen's intellectual property rights to the same extent as do the laws of the
United States. There can also be no assurance that third parties will not assert
intellectual property infringement claims against Telegen. One such matter was
recently dismissed without prejudice to the Company but there is no assurance
that more claims will not be initiated from litigants with more resources than
Telegen. There is no assurance that Telegen will prevail in such litigation
seeking damages or an injunction against the sale of Telegen's products or that
Telegen will be able to obtain any necessary licenses on reasonable terms or at
all.
-11-
<PAGE>
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.
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 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. The Company and TDL recently were served
with the Complaint. The Company believes that 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Exhibit Title
------- -----------------------------------------------
3.1* Articles of Incorporation of Telegen
Corporation dated August 30, 1996 [formerly
known as Solar Energy Research Corp.]
3.2* Certificate of Amendment to Articles of
Incorporation of Telegen Corporation dated
October 28, 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
10.22* Exchange Offer Agreement by and between the
Company and certain holders of Common Stock
dated March 24, 1998.
11.1*** Statements Re Computation per Share-Earnings
27.1 Financial Data Schedule
----------------
-12-
<PAGE>
* Incorporated by reference herein to the Form 10-K filed by the Registrant on
April 15, 1998 and Amended on April 30, 1998.
** Incorporated by reference herein from the 8-K filed by the Registrant on
March 25, 1997.
*** Incorporated by reference from the Consolidated Statements of Operations and
Comprehensive Income Statement and the accompanying footnotes to the
financial statements herein.
(b) Reports on Form 8-K
The following is a list of Current Reports on Form 8-K filed by the
Registrant during the quarter ended March 31, 1998:
1. 8-K filed on January 15, 1998 to report that the Registrant
sold its wholly-owned subsidiary Morning Star Multimedia,
Inc., a New Jersey corporation.
2. 8-K filed on March 24, 1998 to report that the Registrant and
certain of its former executive officers are involved in
certain legal proceedings.
-13-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Redwood City, California.
TELEGEN CORPORATION
Date: May 12, 1998 By: /s/ Fred Kashkooli
---------------------------
Fred Kashkooli
Chief Executive Officer
(Duly Authorized Office and
Principal Financial
and Accounting Officer)
-14-
<PAGE>
Exhibit Index
Exhibit
No. Description
------- --------------------------------------------
27.1 Financial Data Schedule
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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<RECEIVABLES> 241,373
<ALLOWANCES> 72,753
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0
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<COMMON> 15,362,868
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<TOTAL-LIABILITY-AND-EQUITY> 1,949,234
<SALES> 57,900
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<CGS> 24,578
<TOTAL-COSTS> 24,758
<OTHER-EXPENSES> 1,002,309
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<INTEREST-EXPENSE> 115,046
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