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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended DECEMBER 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to __________
Commission file number 0-21864
TELEGEN CORPORATION
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(Exact name of small business issuer as specified in its charter)
CALIFORNIA 84-067214
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1840 GATEWAY DRIVE, SUITE 200, SAN MATEO, CALIFORNIA 94404
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(Address of principal executive offices)
(650) 261-9400
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(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE.
Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK.
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [ ] No [X]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B not contained in this form, and no disclosure will be
contained, to the best of the issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
For the fiscal year ended December 31, 1999, the issuer's revenues were $0.
As of December 31, 1999, the aggregate market value of issuer's voting stock
held by non-affiliates was $2,857,389.
Documents Incorporated by Reference: Yes
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 13(d) of the Exchange Act after the distribution of
Securities under a plan confirmed by a court. Yes [X] No [ ]
This Report on Form 10-KSB contains information concerning the issuer
relating to the fiscal year ended December 31, 1999, except where otherwise
indicated.
Telegen Corporation
Annual Report on Form 10-KSB
Table of Contents
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PART I
ITEM 1. DESCRIPTION OF BUSINESS ............................................ 3
ITEM 2. DESCRIPTION OF PROPERTY ............................................ 8
ITEM 3. LEGAL PROCEEDINGS .................................................. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................10
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ...........10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ..............................................11
ITEM 7. FINANCIAL STATEMENTS................................................16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ...............................................17
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT ..................17
ITEM 10. EXECUTIVE COMPENSATION .............................................18
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .....22
ITEM 12. CERTAIN BUSINESS RELATIONSHIPS AND RELATED TRANSACTIONS ............23
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ....24
SIGNATURES
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-KSB (this "Form 10-KSB"),
including statements under "Item 1. Description of Business," "Item 3 Legal
Proceedings" and "Item 6. Management's Discussion and Analysis", constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1934, as amended, and the Private Securities Litigation Reform Act of
1995 (collectively, the "Reform Act"). Certain, but not necessarily all, of such
forward-looking statements can be identified by the use of forward-looking
terminology such as "believes", "expects," "may," "will," "should," or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of Telegen Corporation ("the Company", "we" or "us") to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. References in this form
10-KSB, unless another date is stated, are to December 31, 1999.
BUSINESS OF TELEGEN
Telegen Corporation ("Telegen" or the "Company") is a high technology company
with products in development in the flat panel display market. At present,
Telegen is organized as a holding company with two inactive subsidiaries.
Telegen Display Laboratories, Inc. ("TDL"), a California corporation and a
controlled second tier subsidiary of the Company, is developing a low-cost flat
panel display technology to compete with other types of flat panel displays.
Telegen Communications Corporation ("TCC"), a California corporation and a
wholly-owned subsidiary of the Company, formerly developed, manufactured and
marketed a line of internet and intelligent telecommunications products which
provide additional features to existing telephone equipment used by consumers
and small businesses. Telegen's corporate offices are located at 1840 Gateway
Drive, Suite 200, San Mateo, CA 94404, (650) 261-9400.
Telegen was incorporated in California on August 30, 1996. This corporation was
formed to acquire Telegen Communications Corporation, formerly known as Telegen
Corporation, and Solar Energy Research Corporation, a publicly held shell
corporation.
On October 28, 1998, the Company commenced a reorganization case under Chapter
11 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern
District of California, San Francisco Division ("Bankruptcy Court"), designated
as IN RE TELEGEN CORPORATION, case number 98-34876-DM-11. During the period of
this Report 10-KSB, the Company managed its affairs as a "debtor-in-possession",
subject to supervision of the Bankruptcy Court, including the requirements that
the Company file certain reports and seek court approval for certain actions,
primarily any actions outside the ordinary course of business. In subsequent
events, the Company filed a Plan of Reorganization on April 22, 2000 and the
Bankruptcy Court confirmed the Plan of Reorganization on June 28, 2000.
In the period ending December 31, 1999, certain significant developments
occurred. On March 5, 1999, the Company accepted the resignations of Eric V.
Stafford as Chief Financial Officer and a director and John McMullen as a
director. On November 9, 1999, the Company signed a Selling Agreement with WMS
Financial Planners, Inc. of Seattle, WA and Pacific West Securities, Inc., of
Renton, WA, Investment Banking Advisor and Managing Broker, respectively, to
conduct a $500,000 debt offering and a $13.8 million equity offering for the
Company. On November 30, 1999, the Bankruptcy Court approved the Selling
Agreement and the Company closed the $500,000 debt offering on December 3, 1999.
On December 15, 1999, the Company commenced an offering (the "1999 Offering") of
post reorganization shares of common stock of the Company (the "New Common
Stock") at a price of $1.75 per share. On March 7, 2000 the Company closed the
1999 Offering upon the receipt of subscriptions for 4,000,000 shares of New
Common Stock and gross proceeds of $7,000,000.
TELEGEN DISPLAY LABORATORIES, INC.
Telegen Corporation, through its second tier subsidiary, Telegen Display
Laboratories, Inc. ("TDL"), is developing a proprietary flat panel display
technology known as High Gain Emissive Display ("HGED"), which represents a
departure from the current product offerings on the market today. The Company
believes that this technology has visual characteristics and potentially
relative ease of manufacturing and low costs that could enable Telegen to become
a significant participant in the display business.
Telegen expects its HGED flat panel display technology to compete favorably
against other flat panel display technologies, presently including Active Matrix
Liquid Crystal Display technology ("AMLCD"), Field Emission Display technology
("FED"), Plasma Display Panel technology ("PDP") and Organic Light Emitting
Diode technology ("OLED"), in terms of resolution, brightness, color, viewing
angle
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and manufacturability. More significantly, Telegen believes HGED displays may be
manufacturable in large sizes at a lower cost than the other technologies and,
since HGED display fabrication requires minimal semiconductor processing, the
Company believes the cost of a manufacturing plant could be less than a
comparable AMLCD plant with a larger production capacity.
Telegen also believes a second generation of the HGED technology, known as
"Level 5" technology, which will require further development before
commercialization, could potentially provide enhanced performance with lower
manufacturing costs than AMLCD and other flat panel display technologies.
Primary differences between the Telegen flat panel display and a good quality
Cathode Ray Tube ("CRT") monitor include its reduced thickness and weight, lower
operating voltage, higher reliability and potentially brighter presentation.
Telegen believes that these features could make HGED displays desirable for many
products in today's display marketplace.
The HGED technology is an emissive display technology similar in aspects to
the CRT and the Vacuum Fluorescent Display but which utilizes, among other
technical details, an enhanced thermionic electron generating structure, a
proprietary row control structure, proprietary phosphor technology and
proprietary electronic driver systems to construct a simple, flat, low
voltage CRT-like display. Whereas the traditional CRT uses very high voltages
(Greater than 25,000 volts) and high magnetic fields to control a single,
high powered electron beam located far from the faceplate, the HGED controls
dozens of small, low powered close-in beams, creating a display less than
1.5" in thickness.
Laboratory prototypes based upon aspects of the Telegen technology have been
fabricated in sizes up to 10.5" diagonal with full color and full gray scale and
which run a television standard (NTSC) signal from a videotape. Additionally,
high brightness test cells have been constructed in the next step of development
for the more advanced and potentially lower cost Level 5 technology.
Telegen believes that its flat panel display technology has substantial value.
Telegen is in active discussion with several prospective partners to obtain
substantial new capital in the form of either an equity investment in Telegen, a
new joint venture company or project financing, which Telegen will need to
complete development of the HGED technology and build a pilot production
facility. Telegen's research and development facility is located in Silicon
Valley and the Company plans to license the manufacturing of the display into a
broad range of display markets in order to facilitate the quickest possible
market acceptance.
Telegen plans to establish a prototype production line in new facilities in
early 2001, which could produce a limited number of displays per year, and then
to build a full scale production plant (250,000 displays per year capacity) in
2002/2003 with the proceeds from future funding. In 1996, Telegen sold a 10%
equity interest in TDL for $5 million to a joint venture investment group based
in Singapore. Along with the investment, the joint venture group was granted an
option to acquire licenses to build up to four plants in specified Asian
locations, each with the capacity to produce up to one million flat panel
displays per year.
On January 7, 1998, the Singapore based joint venture investment group (the
"Plaintiffs") filed a complaint in Superior Court, San Mateo County, CA, against
the Company, TDL and certain current and former officers and directors of
Telegen. On July 29, 1999, the Company settled the litigation with each party
denying any liability, return of the 10% interest in TDL to the Company,
termination of the plant licenses and a payment of insurance proceeds by
Telegen's D&O insurers with no costs to the Company or the other defendants. See
"Item 3. Legal Proceedings."
DISPLAY PATENTS AND MANUFACTURING
On November 7, 1998, the Company received its first U. S. patent on aspects of
the HGED flat panel display technology, U. S. Patent # 5,831,397 titled
"Deflecting Apparatus for a Flat Panel Display Illuminated by Electrons." On
September 7, 1999, the Company received its second U. S. patent on aspects of
the HGED flat panel display technology, U. S. Patent # 5,949,395 titled "Flat
Panel Matrix-Type Emissive Display." The Company currently has two additional
flat panel display patents pending and expects to file up to ten new flat panel
display patents over the next two years. The Company expects these and future
patents to protect its proprietary technologies and techniques for building
highly cost effective flat panel displays without the use of high-tech
semiconductor facilities.
No arrangements have been completed regarding the manufacture of flat panel
displays based upon the Company's HGED technology. The HGED technology is
expected to eventually cost under $5.00 per square inch in high volume
production. Telegen believes that pricing at this level, if achieved, will give
it a competitive advantage, assuming the costs of competing technologies are not
also reduced to these levels. No assurances can be given that these
manufacturing costs can ever be achieved by the Company. Although it is
difficult to precisely project the capital costs for establishing a high volume
manufacturing facility, Telegen's initial estimates indicate that the entry cost
into the display business utilizing the HGED flat panel display technology could
be significantly lower than other competitive emerging technologies.
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FLAT PANEL MARKET
For close to the past 50 years, the Cathode Ray Tube ("CRT") has been the gold
standard against which all displays are judged. Producing the brightest display
with the highest contrast, fastest speed and highest resolution, the CRT
accounts for over 90% of the worldwide market for displays. In 1997 alone, it is
estimated that over 78 million 15" to 17" CRT-based computer monitors were sold,
as well as over 120 million CRT-based television sets. By the year 2000, it is
estimated that CRT-based computer monitor sales alone will rise to over 100
million units sold.
Despite its dominance of the display market, the CRT has its shortcomings,
making it vulnerable to new technologies capable of providing equal
performance at reasonable cost. Besides its weight, bulk and handling issues,
the CRT requires dangerously high electrical voltages (Greater than 25,000
volts), generates magnetic and electrical fields and, most alarming, the CRT
generates harmful X-rays.
In development since the early 1970s, the flat panel display has been utilized
in a wide variety of consumer and industrial applications. In the mid 1980s, due
to its thin size, light weight, low voltage and low power consumption, the flat
panel display fueled the emergence and growth of the laptop computer, one of the
fastest growing computer segments. The predominant flat panel technology, the
Active Matrix Liquid Crystal Display or AMLCD, fueled by the growth of the
laptop market, is estimated to account for 74% (in dollars) of the worldwide
flat panel market today.
The total flat panel display market, as estimated by Stanford Resources, Inc,
was $13.6B for 1998, growing to an estimated $19B by the year 2000 and to an
estimated $31B by the year 2003, an annual growth rate of approximately 18%. Of
this total, AMLCD was estimated to account for $10B in 1998 and is projected to
account for $14.3B in 2000 and $23.8B in 2003.
Telegen believes that it is enviably situated to capture a significant portion
of the expanding flat panel display market over the next five years. The three
major competing technologies, AMLCD, FED and PDP, all suffer from serious
drawbacks in critical areas.
Since Telegen anticipates that its display may cost less than an equivalent
AMLCD display, Telegen expects to have a significant competitive advantage in a
number of flat panel display markets. AMLCD manufacturing costs have plateaued
and increased display sizes have decreased yields as well as raised plant costs.
Additionally, demand for AMLCDs outstripped supply for the first time at the end
of 1998 and prices are now expected to rise through 2000.
FED technology has been demonstrated in sizes up to 15" diagonal (with defects)
but, due to yield issues and the availability of production equipment, has not
been commercially manufactured in large sizes. Since the FED is a
semiconductor-based technology like AMLCD, increased display sizes can lead to
decreased yields as well as increased plant costs.
PDP displays have been in limited production since 1994 but have yet to achieve
any meaningful cost reductions, making PDP one of the most expensive flat panel
display technologies commercially available today.
The HGED technology does not suffer from the limitations inherent in
semiconductor-based display technologies. Displays constructed using HGED
technology do not have millions of transistors built directly into the display
(like AMLCD) or millions of microscopic emission structures under each picture
element (like FED). It is expected that manufacturing plant cost for HGED will
be closer to that of the CRT than to semiconductor-based flat panel display
technologies.
FLAT PANEL COMPETITION
The market for information displays, including flat panel displays, is highly
competitive, and the Company expects this to continue. Telegen believes there is
currently no comparable flat panel display with the potential low cost, full
emissive color, full gray scale and the other attributes of the HGED technology
available commercially from any other source in volume production. The standard
flat panel displays currently available in volume production are Passive Matrix
LCD and Active Matrix LCD or AMLCD. These displays are manufactured in high
volume by a number of large Japanese companies, including Toshiba, Epson,
Matsushita, Seiko, Hitachi, NEC and Sharp Electronics.
Several Japanese companies have recently introduced color plasma-driven liquid
crystal display ("LCD") flat panel displays of 40" diagonal size which are
available in the U. S. for about $8,000 retail.
Full-color Plasma Display Panels ("PDP") have been in limited production since
1994 and are available in the U. S. in sizes from approximately 27" diagonal to
42" diagonal and at retail prices ranging from $5,000 to $20,000. They are
manufactured by a number of Japanese companies, including Fujitsu, Matsushita,
Hitachi and NEC and the Korean display manufacturer Orion Electric Company.
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Additionally, a number of companies, including Candescent Technologies
Corporation, PixTech and Motorola are developing a technology known as Field
Emission Display (FED). FED displays are constructed using semiconductor
technology and are therefore inherently expensive and limited in size to the
available production equipment. FED displays are not available in volume
production at this time.
A new technology known as Organic Light Emitting Diode ("OLED") is presently in
development at a number of universities including Princeton University and USC
as well as US-based companies, including eMagin Corporation (formerly FED
Corporation), Motorola, Universal Display Corporation and Eastman Kodak. OLED
production displays are not available in volume production at this time.
The market for Telegen's display 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. There are a number of well funded U. S. companies, such as
Candescent Technologies, Motorola, Kopin, PixTech and IBM, which are developing
products to compete with the Company's HGED flat panel display technology. There
can be no assurance that the Company will be able to compete effectively against
these or any of its competitors, most of whom have substantially greater
financial resources than the Company.
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.
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, most of whom have substantially
greater financial resources than Telegen. Flat panel displays manufactured
utilizing AMLCD technology have been in production for over 10 years and have
proven market acceptance. New technologies, such as FED, OLED and Color Plasma,
are in development by a number of potential competitors, most, if not all, 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
flat panel 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 flat panel technology will
be successful or, if patent protection is obtained, that Telegen's patent(s)
will provide adequate protection.
TELEGEN COMMUNICATIONS CORPORATION
Telegen Communication Corporation ("TCC"), formerly known as Telegen
Corporation, was organized in May 1990, for the purpose of designing,
developing, manufacturing and marketing a line of telephone accessory products
for the consumer and small business markets.
All of the assets of TCC were sold to SynerCom, Inc., a Nevada corporation
("SynerCom") organized by a group of investors led by Frederick T. Lezak, Jr.,
an executive officer and director of the Company, on April 1, 1998 for $500,000,
$350,000 in cash and $150,000 in the form of an eighteen month promissory note,
the assumption of certain wage, tax and other liabilities, and certain royalties
on certain products sold for a period of three years.
On November 15, 1998, the Company declared SynerCom in default of the asset
purchase agreement for failure to make payment required under the agreement. In
a subsequent event, on July 10, 2000, the Company recovered substantially all of
the assets of TCC in return for a payment of $160,000 to SynerCom by the Company
and a general release between the Company, SynerCom and its principals.
The telephone equipment market is a long-standing, well-established industry.
The basis of the industry has historically been the telephone itself. In the
late 1970's, however, a market for telephone peripheral equipment began to
develop because of the invention of the microprocessor chip and deregulation of
the industry. This new peripherals market expanded rapidly and today consists of
designer and specialty telephones, including full-feature and cordless
telephones, cellular telephones, telephone answering machines, FAX machines and
computer modems.
From formation until April 1, 1998, when substantially all of its assets were
sold to SynerCom, TCC developed, manufactured and marketed a line of intelligent
telecommunications products, providing enhanced features to existing telephone
equipment and services for consumers and small businesses. TCC is presently an
inactive subsidiary of the Company.
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In 1991, TCC introduced its initial telecommunications product, a telephone call
restrictor known as "TeleBlocker", to provide consumers and small businesses
with the ability to restrict outgoing telephone usage in order to control costs.
Telegen sold this product under its own brand and in partnership with companies
such as AT&T and Bell Atlantic. In 1995 and 1996, TCC developed a line of
telephone dialers, known as the "Automated Carrier Selector", to give consumers
the ability to automatically reroute outgoing calls to alternative long distance
companies. Telegen's dialer products were sold primarily through long distance
companies such as MCI and Sprint.
TCC's dialer products incorporated a proprietary technology known as "Parallel
Technology", which allows one dialer device, plugged anywhere on a telephone
line, to control all instruments on the line regardless of location and with no
requirement for re-wiring. All of TCC's programmable products also utilized a
proprietary technology known as the Remote Programming System ("RPS"). RPS is a
combination of communications hardware, protocols and automated computer systems
which enable TCC's Customer Service representatives to directly service and
program any TCC product over the telephone line when a customer calls for
assistance.
On December 31, 1996, the Company was awarded a broad (60 claims) U. S. patent
covering the Parallel and RPS technologies, U. S. Patent #5,590,182 titled
"System for Interception and Transmission of Communication Signals on Telephone
and Data Lines." This patent was assigned to SynerCom on April 1, 1998 but, in a
subsequent event, was re-assigned back to Telegen in July 2000.
TELEGEN RESEARCH AND DEVELOPMENT
Telegen's research and development expenses for the years ending December 31,
1999 and 1998 were $55,928 and $537,760, respectively. Due to the reorganization
and severe financial constraints, research and development expenses for the year
1999 were substantially below those of earlier years. Telegen estimates that
expenditures for research and development related to flat panel display
development will increase substantially after completion of reorganization to
approximately $3,000,000 for the year 2000.
During the years 1999 and 1998, all of Telegen's research and development
expenses were related to development activities of Telegen Display Laboratories,
Inc. ("TDL"). Continued development of the flat panel display technology will
continue to represent significant capital expenditures in the Company's near
term. On April 1, 1998, the Company sold substantially all of its assets in TCC
to a company controlled by two affiliates.
Telegen's strong emphasis on new product and technology research and development
will command management's primary attention for the foreseeable future. It will
also comprise the primary use of Telegen's financial resources after completion
of reorganization. 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. In the past, Telegen has experienced substantial delays in
developing its flat panel display technology and may experience similar delays
in the future. If Telegen is unable, for technological or other reasons, to
develop products in a timely manner in response to changes in the industry or if
products or product enhancements that Telegen develops do not achieve market
acceptance, Telegen's results of operations will be materially adversely
affected.
TELEGEN INTELLECTUAL PROPERTY
Telegen has acquired all rights to the underlying technologies embodied in its
product lines from the founders of Telegen or has developed such intellectual
property internally. The Company has entered into agreements with each of its
full-time employees (including its executive officers) that prohibit disclosure
of confidential information to anyone outside of the Company both during and
after employment. The Company also maintains employment agreements with all of
its scientists and engineers which require disclosure and assignment to the
Company of all proprietary rights to any ideas, discoveries or inventions
relating to or resulting from the employee's work for the Company.
The Company routinely files for both United States and foreign patents on its
technologies. Telegen believes, based upon the advice of patent counsel, that
patent protection may be available to the Company on substantial portions of its
technologies. On December 31, 1996, the Company was awarded a broad (60 claims)
U.S. patent covering its Parallel and RPS communications technologies, U.S.
Patent #5,590,182 titled "System for Interception and Transmission of
Communication Signals on Telephone and Data Lines." This patent was assigned to
SynerCom on April 1, 1998 but, in a subsequent event, was re-assigned back to
Telegen in July 2000. On November 7, 1998, the Company received its first U.S.
patent on aspects of the HGED flat panel display technology, U.S. Patent #
5,831,397 titled "Deflecting Apparatus for a Flat Panel Display Illuminated by
Electrons." On September 7, 1999, the Company received its second U.S. patent on
aspects of the HGED flat panel display technology, U.S. Patent #5,949,395 titled
"Flat Panel Matrix-Type Emissive Display."
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The Company currently has two additional patents pending and expects to file up
to ten new patents over the next two years. As of December 31, 1999, the Company
has not been issued any foreign patents. The Company also believes it retains
copyright protection for the software used in its products as well as for its
integrated circuit designs.
It is the policy of Telegen to aggressively protect, through all appropriate
means, all if its legal rights to its technologies. There are currently no
claims pending or asserted against any of the Company's technologies or
intellectual property. The Company relies on a combination of patents, trade
secret and other intellectual property law, nondisclosure agreements and other
protective measures to protect its rights pertaining to its products and
technologies. Such protection, however, may not preclude competitors from
developing products similar to the Company's products. 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. Although the Company
continues to implement protective measures and intends to defend its proprietary
rights vigorously, there can be no assurance that these efforts will be
successful. See "Item 6. Management's Discussion and Analysis - Risk Factors -
Intellectual Property."
HGED FLAT PANEL DISPLAY LICENSING
The Company has established a corporate policy to actively explore licensing
opportunities for all of its products and technologies. The Company has a number
of proprietary technologies for which it has secured either patent or trade
secret protection and which the Company believes are licensable. Telegen
believes that its HGED flat panel display technology has substantial value and
could be the basis of both strategic relationships as well as licensing
opportunities. The Company believes that, if it can license the HGED technology
on favorable terms to a wide range of companies located in all major markets,
both domestic and foreign, it can achieve the quickest possible market
acceptance of the technology.
REGULATORY MATTERS
Telegen's subsidiary, Telegen Communications Corporation, developed and
manufactured products that are required to comply with the Federal
Communications Commission ("FCC") Rules, Part 68, as amended. Before such
products can be sold, they must be tested for compliance by an accredited
independent testing laboratory and the test results submitted to the FCC. The
manufacturer then receives an FCC Registration Number, which must be displayed
on each product. To the Company's knowledge, for the period up to the sale of
substantially all of TCC's assets, TCC has been compliant with all FCC
requirements for its telecommunications products.
Telegen's flat panel display subsidiary, Telegen Display Laboratories, Inc.,
currently inactive, is subject to handling and reporting requirements of the
U.S. Environmental Protection Agency (the EPA), the California Occupational
Safety and Health Administration (CalOSHA) and local environmental authorities
regarding the handling and storage of certain chemical materials used in the
development and manufacture of its flat panel displays. The Company believes it
is in full compliance with all rules, regulations and requirements promulgated
by these authorities and maintains and aggressive internal safety and compliance
program. See "Item 6. Management's Discussion and Analysis - Risk Factors -
Federal, State and Local Regulatory Rules and Regulations."
TELEGEN EMPLOYEES
As of December 31, 1999, Telegen employed 5 persons on a full-time basis,
including three executive officers and a general support staff. Telegen also
employs consultants and independent contractors, many of whom the Company
intends to hire as full time employees upon completion of its reorganization.
Telegen believes that its employee relations are good. In October 1998, the
majority of Telegen's staff resigned. The Company's future success will depend
in significant part upon the continued service of certain remaining 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. See "Item 6.
Management's Discussion and Analysis - Risk Factors - Telegen's Dependence Upon
Key Personnel."
Telegen has entered into agreements with each of its employees (including its
executive officers) that prohibit disclosure of confidential information to
anyone outside of Telegen both during and after employment and requires
disclosure and assignment to the Company of all proprietary rights to any ideas,
discoveries or inventions relating to or resulting from the employee's work for
Telegen.
Telegen has limited marketing experience and expanding the Company'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.
ITEM 2. DESCRIPTION OF PROPERTY
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Telegen maintains its corporate offices at 1840 Gateway Drive, Suite 200, San
Mateo, California 94404. Also located at this address are the corporate offices
of Telegen's subsidiaries, Telegen Communications Corporation and Telegen
Display Laboratories, Inc. Through December 31, 1999, the Company also utilized
approximately 1,200 square feet of office and laboratory space in Foster City,
California, provided rent free to the Company by its President, Jessica L.
Stevens.
From approximately October 1, 1996 through September 30, 1998, the Company and
its subsidiaries, Telegen Communications Corporation and Telegen Display
Laboratories, Inc., maintained corporate offices at 101/199 Saginaw Drive,
Redwood City, California, 94063. On September 30, 1998, pursuant to a
stipulation entered into by the former management in an unlawful detainer action
brought by Telegen's former landlord, Metropolitan Life Insurance Company
("MetLife"), a judgment was entered against the Company, which, among other
things, declared that the Company's leases for its Redwood City business
premises had been forfeited. Had they not been terminated, the leases had terms
extending for another thirty-four months and their rental rates appeared to have
been substantially below current market rates.
All of Telegen's business and technology records were located in the Redwood
City premises, as well as a substantial amount of furniture, laboratory
equipment and Telegen's HGED flat panel prototype assembly line. Therefore, the
current management determined that its best course of action was to commence a
Chapter 11 Case because, among other things, commencement of the case might
preserve the Company's equity in the leases and stay any efforts by the MetLife
to remove Telegen's property before it could be organized and removed in an
orderly manner by the Company. On October 28, 1998, the Company commenced a
reorganization case under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the Northern District of California, San Francisco
Division, designated as IN RE TELEGEN CORPORATION, case number 98-34876-DM-11.
By December 31, 1998, the Company had removed and stored all of its valuable
property and records from its former Redwood City facilities. However,
termination of the leases divested the Company of its only existing research and
production facilities at the time.
On or about December 28, 1998, the Company commenced an adversary proceeding
against MetLife in the Bankruptcy Court seeking avoidance of the termination of
the leases on the grounds that the transfer to MetLife of the Company's equity
in the leases constituted a fraudulent transfer within the meaning of the
Bankruptcy Code and seeking to recover the value of those transferred leases,
estimated to be in excess of $500,000 after allowed offsets to the Landlord. In
a subsequent event, the adversary proceeding against MetLife was settled in
January 2000 with MetLife reducing its claim in the Chapter 11 Case from
$1,018,553.95 to $250,000 and the Company allowing MetLife a $75,000
administrative claim to cover post petition decommissioning and marketing costs
for both premises.
In December, 1999, the Company entered into a sublease, commencing January 10,
2000, of approximately 2,000 square feet of R&D facilities at 1167A Chess Drive,
Foster City, California, at a net cost of approximately $3,300 a month,
including Telegen's respective share of the building's operating expenses. These
facilities are inadequate to complete development of the HGED display technology
and therefore the Company plans to lease additional larger facilities as soon as
practicable. Telegen believes there is adequate space available in its immediate
area for these new facilities, but there can be no assurance that additional
space can be located on favorable terms or that the Company will not incur
significant expenses to relocate to new facilities
ITEM 3. LEGAL PROCEEDINGS
BANKRUPTCY. On October 28, 1998, the Company commenced a reorganization case
("Chapter 11 Case") under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the Northern District of California, San Francisco Division
("Bankruptcy Court"), designated as IN RE TELEGEN CORPORATION, case number
98-34876-DM-11. During the period of this Report 10-KSB, the Company managed its
affairs as a "debtor-in-possession", subject to supervision of the Bankruptcy
Court, including the requirements that the Company file certain reports and seek
court approval for certain actions, primarily any actions outside the ordinary
course of business. In subsequent events, the Company filed a Plan of
Reorganization on April 21, 2000 and the Bankruptcy Court confirmed the Plan of
Reorganization on June 28, 2000.
SHAREHOLDER SUIT. The Company and its subsidiary, Telegen Display Laboratories,
Inc. ("TDL"), were named defendants in a complaint (the "Complaint") filed
January 7, 1998 in Superior Court, San Mateo County, CA, by IPC Corporation,
Ltd., Transtech Electronics, Pte, Ltd., and IPC-Transtech Display, Pte, Ltd,
(collectively, the "Plaintiffs"). The Complaint alleges that the Company
committed material misrepresentations when the Company sold Plaintiffs a 10%
interest in TDL for $5,000,000 on May 30, 1996. Along with the investment, the
Plaintiffs were granted an option to acquire licenses to build up to four plants
in specified Asian locations, each with the capacity to produce up to one
million flat panel displays per year. Additional named defendants included
Jessica L. Stevens, Warren M. Dillard, Bonnie Crystal, and William J. P.
Weiland, all then former officers of the Company. The Plaintiffs sought
rescission of the original purchase, complete restitution of the $5,000,000,
interest, punitive damages, costs and attorneys' fees. On July 29, 1999, the
Company settled the litigation on confidential terms with each party denying any
liability, return of the 10% interest in TDL to the Company,
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termination of the plant licenses and a payment of insurance proceeds to the
Plaintiffs by Telegen's D&O insurers with no costs to the Company or the other
defendants.
METLIFE SUIT. On September 30, 1998, pursuant to a stipulation entered into by
the former management in an unlawful detainer action brought by Telegen's former
landlord, Metropolitan Life Insurance Company ("MetLife"), a judgment was
entered against the Company which, among other things, declared that the
Company's leases for its former business premises at 101/199 Saginaw Drive,
Redwood City, California 94063 had been forfeited. Had they not been terminated,
the leases had terms extending for another thirty-four months and their rental
rates appeared to have been substantially below current market rates.
Termination of the leases also divested the Company of its only existing
research and production facilities at the time.
On or about December 28, 1998, the Company commenced an adversary proceeding
against MetLife in the Bankruptcy Court seeking avoidance of the termination of
the leases on the grounds that the transfer to MetLife of the Company's equity
in the leases constituted a fraudulent transfer within the meaning of the
Bankruptcy Code and seeking to recover the value of those transferred leases,
estimated to be in excess of $500,000 after allowed offsets to the Landlord. In
a subsequent event, the adversary proceeding against MetLife was settled in
January 2000 with MetLife reducing its claim in the Chapter 11 Case from
$1,018,553.95 to $250,000 and the Company allowing MetLife a $75,000
administrative claim to cover post petition decommissioning and marketing costs
for both premises.
MISCELLANEOUS SUITS. Throughout 1998, numerous actions were filed against the
Company seeking payment for debts. The Chapter 11 filing on October 28, 1998
stayed all of these actions and they were resolved upon confirmation of the
Company's Plan of Reorganization.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company during
the fiscal year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 31, 1999, the common stock of the Company traded on the
over-the-counter Electronic Bulletin Board (the "EBB"). The EBB is a real-time
electronic quotation service for over-the-counter securities. The EBB is not an
automated quotation system and is characterized by low volume of trading and
lack of liquidity. There is no assurance that the EBB can or will provide
sufficient liquidity to holders of the Company's common stock. The common stock
was trading on the Nasdaq SmallCap Market until January 22, 1998.
In a subsequent event, on April 19, 2000, the Company's common stock was
delisted from the EBB and listed on the Pink Sheets. The Pink Sheets is not an
automated quotation system and is characterized by low volume of trading. There
is no assurance that the Pink Sheets can or will provide sufficient liquidity
for the purchase and sale of the Company's common stock. The Company intends to
return to the Nasdaq SmallCap market 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 the Company will be
successful in relisting its stock on the Nasdaq SmallCap Market, in the near
future, if at all, or that, if such efforts are successful, a broad trading
market will develop in the Company's stock.
The following table sets forth the quarterly high and low bid prices of the
Company's common stock from January 2, 1998 until December 31, 1999. On June 30,
2000, the Company effected a one-for-16 reverse split of its common stock. All
share data in the following table has been retroactively restated to reflect
this reverse stock split. Such prices represent prices between dealers, do not
include retail mark-ups, markdowns or commissions and may not represent actual
transactions.
<TABLE>
<CAPTION>
QUARTER ENDED BID PRICES
------------- -----------------
HIGH LOW
------ -----
<S> <C> <C>
March 31, 1998 $17.44 $4.48
June 30, 1998 $22.08 $4.32
September 30, 1998 $7.68 $1.60
December 31, 1998 $2.08 $0.32
March 31, 1999 $4.80 $0.32
June 30, 1999 $3.04 $0.80
September 30, 1999 $1.60 $0.96
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December 31, 1999 $3.68 $0.48
</TABLE>
As of December 31, 1999, there were 950,360 post-effective shares issued and
outstanding and approximately 726 holders of record of the Company's common
stock. The Company believes that a significant number of beneficial owners of
its common stock hold shares in street name. No dividends have ever been paid to
Telegen's common stock shareholders and Telegen does not anticipate paying
dividends in the future.
On December 15, 1999, the Company commenced an offering (the "1999 Offering") of
post reorganization shares of common stock of the Company (the "New Common
Stock") at a price of $1.75 per share. On March 10, 2000 the Company closed the
1999 Offering upon the receipt of subscriptions for 4,000,000 shares of New
Common Stock and gross proceeds of $7,000,000. The proceeds were held in escrow
until confirmation of the Plan of Reorganization on June 28, 2000 and were
thereafter released to the Company. Upon the effectiveness of the Company's Plan
of Reorganization, the existing common stock of the Company was exchanged for
the New Common Stock in a ratio of 16 existing shares of common shares for 1
share of New Common Stock. This is commonly referred to as a one-for-16 reverse
split.
The 1999 Offering was conducted by Pacific West Securities, Inc., of Renton, WA,
as placement agent and WMS Financial Planners, Inc., of Seattle, WA, as
Investment Banking Advisor, together the Selling Agents. The Selling Agents
earned a cash commission of ten percent (10%) of the gross proceeds of the 1999
Offering, or $700,000, which was subsequently paid in shares of New Common Stock
of the Company at a rate of one share for each $1.75 of compensation otherwise
payable. In addition, the Selling Agents earned a stock commission of three
percent (3%) of the shares sold under the 1999 Offering, or 120,000 shares of
New Common Stock of the Company. The Selling Agents were also issued a warrant
to purchase 400,000 shares of New Common Stock of the Company at a price of
$1.75 per share, exercisable until March 2003. The 1999 Offering was not
registered under the Securities Act of 1933, as amended, and was conducted in
reliance upon the exemption from registration afforded by Rule 506 of Regulation
D under such Act. All of the purchases in the 1999 Offering were either
accredited investors as defined in Regulation D or, with respect to no more than
35 of such investors, were sophisticated investors who were otherwise qualified
to participate in such offering. Appropriate legends were placed upon the
certificates representing the shares of New Common Stock offered and sold and
appropriate instructions were given to the Company's transfer agent to restrict
the resale of such shares.
On April 20, 1999, the Company issued a convertible promissory note (the "First
Note") to Bernard Brown who had been a director of the Company from 1990 to 1995
and who became a director again on June 30, 2000. The note was in the principal
amount of $100,000 and was due and payable upon the earliest of confirmation of
a plan of reorganization or five years from issuance and bore interest at a rate
of 10% per annum.
On December 3, 1999, the Company issued promissory notes (the "Bridge Notes")
to a group of ten investors (the "Bridge Lenders") in the aggregate principal
amount of $500,000 bearing interest at the rate of 15% per annum and due and
payable one year from the date of issuance. In April 1999, the Company
granted to Mr. Brown the option to convert the First Note to shares of New
Common Stock of the Company at the rate of one share of New Common Stock for
each $0.496 of indebtedness. In December 1999, the Company granted to the
Bridge Lenders the option to convert the Bridge Notes into shares of New
Common Stock at a rate of one share of New Common Stock for each $1.40 of
indebtedness. The First Note and the Bridge Notes were issued pursuant to
Section 364(b) of the Bankruptcy Code and were considered unsecured
administrative expenses of the Company within the meaning of Section
1145(a)(1)(A) of the Bankruptcy Code.
ITEM 6. 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 "RISK
FACTORS" IN THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS REPORT. THE FOLLOWING
DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT.
Telegen, through its subsidiary and predecessor corporation, Telegen
Communications Corporation ("TCC"), was organized and commenced operations in
May 1990. From inception until 1993, Telegen was principally engaged in the
development and testing of its telecommunications products. Telegen's first
product sales and revenues were realized in 1991. Revenues in 1991 through 1995
were derived primarily from sales of Telegen's telecommunications products. In
1996, revenues were derived primarily from the operations of Morning Star
Multimedia, Inc. ("MSM"), a subsidiary of the Company. In 1997, revenues were
derived from the operations of MSM
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and TCC, a subsidiary of the Company. In 1998, revenues were derived from the
operations of TCC. Telegen has incurred significant operating losses in every
fiscal year since its inception, and, as of December 31, 1999, Telegen had an
accumulated deficit of $27,790,874. As of December 31, 1999, Telegen had a
working capital deficit of $4,617,256. Telegen expects to continue to incur
substantial operating losses through 2000. In order to become profitable,
Telegen must successfully complete its reorganization, refinance its operations,
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 year ending December 31, 1999 were $0 compared to
$57,900 for 1998. 1998 revenues were entirely attributable to sales by TCC of
ACS 2010 product for the period January 1, 1998 through April 1, 1998, when the
business of TCC was sold.
COST OF GOODS SOLD. Cost of goods sold and contract services were $0 for the
year ended December 31, 1999 and $264,578 for the year ended December 31, 1998.
Cost of goods sold for 1998 related entirely to TCC product sales.
RESEARCH AND DEVELOPMENT. Research and development expenses were $55,928 for the
year ended December 31, 1999 and $537,760 for the year ended December 31, 1998.
Decreased research and development expenses for 1999 resulted from reduced
activities during reorganization; all of the 1999 research and development was
attributable to Telegen. Decreased research and development expenses for 1998
resulted from reduced staffing and a cessation of activities in the last quarter
of the year; all of the 1998 research and development expenses were attributable
to Telegen Display Laboratories, Inc..
SALES AND MARKETING. Sales and marketing expenses for the year ended December
31, 1999 were $45,000, compared with $147,853 for the year ended December 31,
1998. All of the sales and marketing expenses for 1999 were attributable to
Telegen. All of the sales and marketing expenses for 1998 were attributable to
TCC.
GENERAL AND ADMINISTRATIVE. General and Administrative expenses for 1999 were
$1,080,171 as compared with $2,659,374 for 1998. Of the 1999 general and
administrative expenses, $73,007 was attributable to TDL and $1,007,164 was
attributable to Telegen. Of the 1998 general and administrative expenses,
$448,212 was attributable to TDL, $2,112,685 was attributable to TCC and
Telegen, and $98,477 was attributable as a fixed asset impairment loss.
Decreases in 1999 were related to reduced staffing and corporate activities. The
primary components of general and administrative expenses for 1999 were employee
salaries and legal expenses relating to Telegen's reorganization. Decreases in
1998 general and administrative expenses were related to reduced staffing,
corporate activities and the relocation of Telegen to smaller facilities. The
primary components of general and administrative expenses for 1998 were employee
salaries and legal and accounting expenses related to SEC compliance.
INTEREST INCOME AND EXPENSE. Net interest income/expense for 1999 was $0 as
compared with interest expense for 1998 of $1,115,470. 1998 interest income and
expense was attributable to Telegen. Increases in interest expense for 1998
resulted from interest financing charges of $526,315, $52,632, $38,191 and
$322,299 related to discount conversion features on a series of Convertible Note
financings issued on April 1, 1998 for $500,000, April 1, 1998 for $50,000,
April 23, 1998 for $33,526 and May 7, 1998 for $515,532, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Telegen has funded its operations primarily through private placements of its
equity securities with individual and institutional investors. As of December
31, 1999, Telegen had raised $18,845,786 in net capital through the sale of
Telegen common stock, and $4,605,010 in net capital through the sale of TDL
common stock. On June 30, 2000, the Company effected a one-for-16 reverse split
of its common stock. All share and per share data in this section have been
retroactively restated to reflect this reverse stock split.
In April 1998, the Company issued a $500,000 convertible promissory note bearing
interest at 6% per annum with a conversion price of $6.08 per share and a
warrant to purchase $500,000 worth of shares of the Company's common stock at a
conversion price of $6.08 per share. In May 1998, the Company issued a $515,532
convertible promissory note bearing interest at 6% per annum with a conversion
price of $6.08 per share and a warrant to purchase 84,791 shares of the
Company's common stock at a conversion price of $6.08 per share. The Company
also issued 8,479 warrants at an exercise price of $6.08 per share as a
commission for placement services valued at $51,553. In July 1998, the Company
entered into a Satisfaction and Release Agreement in satisfaction of all debts
to one individual and issued the individual a convertible promissory note valued
at $225,000, which was convertible at $6.08 per share in the same month.
12
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On April 1, 1998, SynerCom, Inc., ("SynerCom") purchased substantially all of
the assets of the Company's subsidiary, Telegen Communications Corporation,
valued at $207,584, from the Company in exchange for a cash payment of $350,000,
a note receivable of $150,000, the assumption of certain wage, tax and other
liabilities and the rights to royalty streams on certain Company products for up
to three years. The note receivable was due in six installments of $25,000 each
plus interest of 6% commencing on September 15, 1998. Subsequently, SynerCom
defaulted on the note receivable. The Company recorded an allowance for
uncollectibility of $150,000 as of December 31, 1998.
In April 1999, the Company issued a convertible promissory note (the "First
Note") to Bernard Brown, who had been a director of the Company from 1990 to
1995 and who became a director again on June 30, 2000. The note was in the
principal amount of $100,000 and was due and payable upon the earliest of
confirmation of a plan of reorganization or five years from issuance, and bore
interest at a rate of 10% per annum. In April 1999, the Company granted to Mr.
Brown the option to convert the First Note to shares of post reorganization
common stock of the Company at the rate of one share of post reorganization
common stock for each $0.496 of indebtedness.
In December 1999, the Company issued promissory notes (the "Bridge Notes") to a
group of ten investors (the "Bridge Lenders") in the aggregate principal amount
of $500,000 bearing interest at the rate of 15% per annum and due and payable
one year from the date of issuance. In December 1999, the Company granted to the
Bridge Lenders the option to convert the Bridge Notes into shares of post
reorganization common stock at a rate of one share of post reorganization common
stock for each $1.40 of indebtedness.
On December 15, 1999, the Company commenced an offering (the "1999 Offering") of
post reorganization shares of common stock of the Company (the "New Common
Stock") at a price of $1.75 per share. On March 10, 2000 the Company closed the
1999 Offering upon the receipt of subscriptions for 4,000,000 shares of New
Common Stock and gross proceeds of $7,000,000. The proceeds were held in escrow
until confirmation of the Plan of Reorganization on June 28, 2000 and were
thereafter released to the Company.
On March 27, 2000, the Company entered into an agreement with the Selling Agents
to conduct up to three additional offerings of New Common Stock. These offerings
are also being conducted pursuant to Rule 506 of Regulation D under the Act. The
first offering is for 1,000,000 shares of New Common Stock at $10 per share for
total gross proceeds of $10,000,000. The second offering will follow completion
of the first and will be for total gross proceeds of up to $10,000,000. The
third offering will follow completion of the second and will be for total gross
proceeds of up to $5,000,000. The offering prices for the two additional
offerings will be set by the Company and the Selling Agents based upon market
conditions, but are required to be at least $10 per share. As of June 30, 2000,
the Company has been informed by the Selling Agents that subscriptions have been
received for approximately $7,000,000 in the first phase of the offering at $10
per share. The proceeds are being held in escrow until a registration statement
covering all the shares in the offerings has been declared effective by the
Securities and Exchange Commission ("SEC") within 180 days after confirmation of
the Company's Plan of Reorganization.
On March 29, 2000, the Company completed an offering of 500,000 shares of New
Common Stock to a group of foreign investors (the "Regulation S Offering") at a
price of $8 per share for gross proceeds of $4,000,000. The funds are presently
being held in escrow. Closing of the Regulation S Offering is contingent upon
the Company's filing of a registration statement with the SEC to permit the
foreign investors to sell their shares in the public market and receipt of
effectiveness of that statement from the SEC within 180 days after confirmation
of the Company's Plan of Reorganization.
Upon the effectiveness of the Company's Plan of Reorganization, the existing
common stock of the Company was exchanged for post reorganization common stock
in a ratio of 16 existing shares of common shares for 1 share of post
reorganization common stock. This is commonly referred to as a 1:16 reverse
split. The First Note and the Bridge Notes were issued pursuant to Section
364(b) of the Bankruptcy Code and were considered unsecured administrative
expenses of the Company within the meaning of Section 1145(a)(1)(A) of the
Bankruptcy Code.
Due to the unavailability of cash resources for operations, Telegen issued 0
shares of common stock and 75 shares of common stock during 1999 and 1998,
respectively, in lieu of cash as payment for certain operating expenses, legal
fees and employee services, amounting to $0 and $6,000, respectively.
Throughout 1999, Telegen's current working capital has been very limited. The
Company had 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 has tax debts associated with
federal and state wage withholding taxes and social security taxes for the years
1997 and 1998 in the amount of $350,000.
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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 in 2000, 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, if at
all, to meet its capital demands for operations and to complete its
reorganization. If adequate funds are not available to complete its
reorganization, Telegen's Chapter 11 Case might be converted to a case under
Chapter 7, in which case a Chapter 7 trustee would likely liquidate the
Company's assets. Telegen believes it will also require 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, the results of operations from the
flat panel technology will be materially adversely affected.
Telegen does not have a final estimate of costs 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
early 2002. Telegen is also currently contemplating entering into license
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 September 2001, or any significant production of displays thereunder
before early 2002. Telegen is currently planning to establish a limited
production/prototype line after reorganization, which will have the capacity to
manufacture a limited number of marketable displays to produce moderate
revenues. The cost of that production line is estimated to be about $10 million.
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 the technology can be developed and taken to
profitable manufacturing in the foreseeable future. Efforts are currently being
made with parties having substantial resources to conclude such capital
formation. Such capital formation efforts are intended to infuse up to $35
million in 2000, including reorganization expenses and $10 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 after completion of its reorganization, expected
in 2000. 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 $5,000,000 during 2000. Telegen estimates that its total expenditures for
sales and marketing will aggregate over $1,000,000 during 2000.
RISK FACTORS
In addition to the other information in this Report on Form 10-KSB, the
following risk factors should be considered carefully in evaluating the Company
and its business:
CHAPTER 11 PROCEEDING
Telegen filed for reorganization under Chapter 11 of the U. S. Bankruptcy Code
on October 28, 1998. At the time of this filing, the Company estimated the value
of its assets to be approximately $128,309 and liabilities to be approximately
$3,854,288. If adequate funds are not available to complete its reorganization,
Telegen's Chapter 11 Case might be converted to a case under Chapter 7, in which
case the Company's assets would likely be liquidated by a Chapter 7 trustee,
leaving no value for the shareholders. In subsequent events, on April 21, 2000,
the Company filed a Plan of Reorganization with the Bankruptcy Court (the
"Court") and on May 26, 2000 received authorization from the Court to seek the
necessary approvals from its creditors and shareholders. On June 28, 2000, the
Court confirmed the Company's Plan of Reorganization.
DEVELOPMENT STAGE COMPANY WITH NO REVENUES
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Telegen is a developmental stage company with minimal revenues. The Company has
been engaged in lengthy development of its flat panel display technology since
1995 and has incurred significant operating losses in every fiscal year since
its inception. The cumulative net loss for the period from inception through
December 31, 1999 is $27,790,874. The Company will continue to incur operating
losses through 2000. In order to become profitable, the Company must
successfully complete its reorganization, complete development of its HGED flat
panel display technology, develop new products, establish a volume production
line, successfully market and sell its display products, expand its distribution
capability and manage its operating expenses. There can be no assurance that the
Company will meet and realize any of these objectives or ever achieve
profitability.
TELEGEN'S FUTURE CAPITAL NEEDS
Telegen's future capital requirements will depend upon many factors, including
the final costs of Telegen's reorganization, 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 funding through 2000, there can be
no assurance that Telegen will be able to obtain adequate funding or that it
will not require additional funding, or that any additional financing will be
available to Telegen on acceptable terms, if at all, to meet its capital demands
through 2000/2001. If adequate funds are not available to complete its
reorganization, Telegen's Chapter 11 Case might be converted to a case under
Chapter 7, in which case the Company's assets would likely be liquidated by a
Chapter 7 trustee, leaving no value for the shareholders. If adequate funds are
not available for operations, as required, Telegen's results of operations will
be materially adversely affected. Telegen believes it will also require
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 display technology will be materially adversely
affected.
TELEGEN'S EXPOSURE TO TECHNOLOGICAL AND MARKET CHANGE; DIFFICULTY IN DEVELOPING
FLAT PANEL TECHNOLOGY
The market for Telegen's products is characterized by rapid technological change
and evolving industry standards and is highly competitive with respect to timely
product innovation. The introduction of products embodying new technology and
the emergence of new industry standards can render existing products obsolete
and unmarketable. Telegen's success will be dependent in part upon its ability
to anticipate changes in technology and industry standards and to successfully
develop and introduce new and enhanced products on a timely basis. If Telegen is
unable to do so, Telegen's results of operations will be materially adversely
affected. With regard to its flat panel display technology, there are other more
developed and accepted flat panel display technologies already in commercial
production which will compete with Telegen's technology. The Company has not
finished the development of a completed prototype of the HGED flat panel display
technology and certain aspects of the HGED technology have not yet been fully
developed or tested. There can be no assurance that Telegen will be successful
in the development of its flat panel display 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.
FLAT PANEL COMPETITION; FLAT PANEL PATENTS
Major Japanese companies such as Sharp Electronics, Toshiba and Sony dominate
the market for flat panel displays. Telegen expects this competition to
continually increase. There are also a number of well funded U. S. companies,
such as Candescent Technologies, Motorola, eMagin, PixTech and IBM, which are
developing products to compete with Telegen's HGED flat panel display. There can
be no assurance that Telegen will be able to compete effectively against these
or any of its competitors, most of whom have substantially greater financial
resources than the Company. Flat panel displays utilizing AMLCD technology have
been in production for over 10 years and have proven market acceptance. New
technologies, such as FED, OLED and Color Plasma, are in development by a number
of potential competitors, most of whom have greater financial resources than the
Company. 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 the Telegen's HGED technology can compete successfully on a
cost, display quality or market acceptance basis with these other technologies.
Further, although Telegen has received two U. S. patents, there can be no
assurance that Telegen's efforts to obtain additional patent protection for its
HGED technology will be successful or, if additional patent protection is
obtained, that any or all of Telegen's patent(s) will provide adequate
protection. Furthermore, there can be no assurance that Telegen's patents will
not be successfully challenged in future administrative or judicial proceedings.
TELEGEN'S DEPENDENCE UPON LIMITED NUMBER OF MANUFACTURING SOURCES AND COMPONENT
SUPPLIERS
Telegen currently relies upon a limited number of suppliers for the specialized
components and materials used in its flat panel display product. Although
Telegen is currently seeking to qualify alternative sources of supply, the
Company has not yet contracted for alternative
15
<PAGE>
suppliers to provide such specialized components and materials. In the event
that there were an interruption of production or delivery of these specialized
items, Telegen's ability to complete HGED development milestones and deliver
prototype products could be compromised, which would materially adversely affect
Telegen's results of operations. Certain specialized components and materials
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. The Company
anticipates that, as it begins limited volume manufacturing of prototypes of its
flat panel display, it will encounter similar limitations regarding components
and materials. Telegen's inability in the future to obtain sufficient
limited-source components, or to develop alternative sources, could result in
delays in HGED development or introduction, 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, even if such resources are
available, that Telegen's attempts to expand its sales and marketing efforts
will be successful.
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.
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 and technologies. Such protection,
however, may not preclude competitors from developing products or technologies
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 or
that Telegen will be successful in defending its intellectual property rights.
Should an intellectual property infringement claim be asserted against 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.
FEDERAL, STATE AND LOCAL REGULATORY RULES AND REGULATIONS
Telegen's flat panel display subsidiary, Telegen Display Laboratories, Inc.,
currently inactive, is subject to handling and reporting requirements of the
U.S. Environmental Protection Agency (the EPA), the California Occupational
Safety and Health Administration (CalOSHA) and local environmental authorities
regarding the handling and storage of certain chemical materials used in the
development and manufacture of its flat panel displays. Although Telegen
believes it is currently in compliance with all applicable rules, regulations
and requirements, new regulations, rules and requirements are enacted
continually, including local and state initiatives, and there can be no
assurance that future rules, regulations, requirements or initiatives will not
be enacted which could have a material adverse effect upon Telegen's results of
operations.
LISTING OF THE COMPANY'S STOCK ON THE PINK SHEETS
The Company's common stock currently trades on the "Pink Sheets". The Pink
Sheets is not an automated quotation system and is characterized by low volume
of trading. There is no assurance that the Pink Sheets can or will provide
sufficient liquidity for the purchase and sale of the Company's common stock.
The Company's common stock was trading on the Nasdaq SmallCap Market
("SmallCap") until January 22, 1998, when it was listed on the Over-the-Counter
Electronic Bulletin Board (the "EBB"). On April 19, 2000, the Company's common
stock was delisted from the EBB and listed on the Pink Sheets. The Company
intends to return to the SmallCap 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 the Company will be
successful in relisting its stock on the SmallCap, in the near future, if at
all, or that, if such efforts are successful, a broad trading market will
develop in the Company's stock.
ITEM 7. FINANCIAL STATEMENTS
16
<PAGE>
The information required by this Item is set forth in the Company's Financial
Statements and Notes thereto beginning at page F-1 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH THE ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On May 23, 2000, the Company engaged Singer Lewak Greenbaum & Goldstein LLP
("SLGG") as its auditors. Prior to such engagement, the Company did not consult
SLGG regarding the application of accounting principles to a specific
transaction, the type of opinion that might be rendered on the Company's
financial statements or any other matter required to be disclosed herein.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
(a) PROFILES OF DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
DATE DATE
NAMES AGE POSITION COMMENCED TERMINATED **
----- --- -------- --------- -------------
<S> <C> <C> <C> <C>
Jessica L. Stevens * 47 Chair of the Board/President/ 1990 N/A **
Chief Executive Officer/Director
Bonnie A. Crystal * 45 Executive Vice President/Chief 1990 N/A **
Technical Officer/Director
Eric V. Stafford 35 Chief Financial Officer/Director 10/11/98 3/5/99
John McMullen 35 Director 10/11/98 3/5/99
</TABLE>
* c/o Telegen Corporation
1840 Gateway Drive, Suite 200
San Mateo, California 94404
** Jessica L. Stevens and Bonnie Crystal were terminated as officers and
employees on October 31, 1997 but remained directors. They were
reappointed to their prior officer and employee positions on October
11, 1998.
JESSICA L. STEVENS has been an inventor and engineer since 1972. In May 1990,
she co-founded Telegen Communications Corporation, then known as Telegen
Corporation and the predecessor corporation to the Company, with Bonnie A.
Crystal and served as President, Chief Executive Officer and Chair of the Board
until October 1996, when she was appointed to the same offices with the Company
following its merger with Solar Energy Research Corporation. In August 1997, she
stepped down as Chair of the Board and CEO and was appointed Chief Technology
Officer, a position she held until October 31, 1997, when she left the
employment of the Company but remained a director. In October 1998, she returned
to the Company and was reappointed President, Chief Executive Officer and Chair
of the Board. She is also the Chair of the Board, President and Chief Executive
Officer of the Company's subsidiaries, Telegen Communications Corporations and
Telegen Display Laboratories, Inc. From 1988 to 1989, Ms. Stevens was Chair of
the Board of Directors and Vice President of Engineering/Manufacturing at
Absolute Entertainment, Inc. and Imagineering, Inc., both of New Jersey. From
1982 to 1988, Ms. Stevens was Chief Executive Officer, President, Chief
Technology Officer, and a director of Woodside Design Associates, Inc., Redwood
City, California, a high technology think tank. Ms. Stevens has worked as a
consultant to numerous high technology companies including Apple Computer, Inc.,
Activision, Inc., AT&T, GEC Marconi, McDonnell Douglas and Parker Brothers. She
is an active member of the Society for Informational Displays (SID).
BONNIE A. CRYSTAL has been a telecommunications, display and wireless engineer,
consultant and inventor since 1972. In May 1990, she co-founded Telegen
Communications Corporation, then known as Telegen Corporation and the
predecessor corporation to the Company, with Jessica L. Stevens and served as
Executive Vice President, Secretary and a director until October 1996, when she
was appointed to the same offices with the Company following its merger with
Solar Energy Research Corporation. On October 31, 1997, she left the employment
of the Company but remained a director. In October 1998, she returned to the
Company and was reappointed Executive Vice President and Secretary in addition
to the position of Chief Technology Officer. She is also the Executive Vice
President, Chief Technology Officer and a director of the Company's
subsidiaries, Telegen Communications Corporations and Telegen Display
Laboratories, Inc. From 1989 to 1991, she was Senior Staff Engineer for R&D for
Toshiba America MRI, Inc. From 1984 to 1989, she was a Senior Engineer at Astec,
USA, Ltd., specializing in Personal Communications Systems, Cellular, and
Satellite Earth Stations. She
17
<PAGE>
is the inventor of the Video Noise Reduction (VNR) standard for satellite
receivers. She was a founder of International MedCom, Inc. and SE International,
Inc.
ERIC V. STAFFORD has served in various financial positions at Montgomery
Securities, Lazard Freres and Goldman Sachs and Co. From October 1998 to March
1999, Mr. Stafford served as a director of the Company and Chief Financial
Officer. From 1996 to 1998, Mr. Stafford served as Vice President in the
Convertible and Equity divisions at Montgomery Securities. From 1995 to 1996,
Mr. Stafford worked in the Distressed Debt division of Lazard Freres, and from
1992 to 1995, he served as an associate in the High Yield division at Goldman
Sachs and Co.
JOHN MCMULLEN served as an outside director of Telegen from October 1998 to
March 1999. He is the founder and currently President of Stellar Networks, Inc.
of Seattle, Washington. Stellar Networks is a leading provider of webcasting on
the Internet. Prior to Stellar, Mr. McMullen held management positions at
PlanetOut Corporation, RealNetworks, Inc., Aldus Corporation and Adobe Systems.
(b) COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's officers and directors and persons who own more than 10% of a
registered class of the Company's equity securities to file reports of ownership
on Form 3 and changes in ownership on Form 4 or 5 with the Securities and
Exchange Commission (the "SEC"). Such officers, directors, and 10% shareholders
are also required by SEC rules to furnish the Company with copies of all Section
16(a) reports they file.
Based solely on its review of the copies of such forms received by it or written
representations from certain reporting persons, the Company believes that,
during the fiscal year ended December 31, 1999, certain Section 16(a) filing
requirements applicable to its officers, directors, and 10% shareholders were
not complied with. The Company has failed to receive copies, or written
representations, from the following directors of the Company regarding filing a
timely Form 3: Eric V. Stafford and John McMullen. The following 10% beneficial
owners also have failed to provide to the Company copies or written
representations of the filing of a timely Form 3: Stock Acquisition, LLC. and
Dennis Low. In addition, some of the Company's outside directors failed to file
a Form 4 or 5 for grants of options made pursuant to compensation arrangements
with such directors for board service.
ITEM 10. EXECUTIVE COMPENSATION
(a) SUMMARY COMPENSATION TABLE
The following table summarizes the total compensation of the Chief Executive
Officer and the other most highly compensated executive officers of the Company
in fiscal year ended December 31, 1999 (the "Named Executive Officers" or
individually the "Named Executive Officer"), as well as the total compensation
paid to each such individual for the Company's two previous fiscal years.
<TABLE>
<CAPTION>
Total Annual Long Term
Compensation (1) Compensation Awards (2)
-------------------------------- -----------------------
Name and Principal Position Year Salary Paid Salary Accrued Options/SARs (3)
--------------------------- ---- ----------- -------------- ----------------
<S> <C> <C> <C> <C>
Jessica L. Stevens 1999 0 $ 200,000 0
President, Chief Executive Officer 1998(4) 0 $ 171,154(5) 0
and Chair of the Board 1997 $ 166,667 $ 271,000(6) 2,232
Bonnie A. Crystal 1999 0 $ 180,000 0
Executive Vice President, Chief 1998(7) 0 $ 154,038(8) 0
Technical Officer, Secretary 1997 $ 157,500 $ 87,519(9) 2,232
and Director
Eric V. Stafford, 1999 0 $ 27,692 0
Chief Financial Officer 1998(10) 0 $ 35,897 0
and Director
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
(1) Total Annual Compensation includes all cash payments made to the Named
Executive Officer including salary, bonuses and any other cash
compensation.
(2) Long Term Compensation Awards includes any options, SARs or restricted
stock awards granted to the Named Executive Officer.
(3) On June 30, 2000, the Company effected a one-for-16 reverse split of its
common stock. All options, warrants and SAR's have been retroactively
restated to reflect this reverse stock split. All options, warrants and
SAR's outstanding were subsequently cancelled on June 30, 2000, pursuant to
the Company's Plan of Reorganization.
(4) Ms. Stevens was appointed President and Chief Executive Officer on October
11, 1998. Ms. Stevens's annual salary during fiscal year 1998 was $200,000
per year. On June 30, 2000, Ms. Stevens' annual salary was increased to
$500,000 per year.
(5) Includes $125,000 accrued for the period January 1, 1998 through August 17,
1998 and $46,154 for the period October 11, 1998 through December 31, 1998.
(6) Includes $33,333 accrued for the period November 1, 1997 through December
31, 1997. Additionally, $214,590 in accrued salary for the years 1994 and
1995 and $23,077 in accrued vacation pay became due and payable on October
31,1997 when Ms. Stevens left the employment of the Company.
(7) Ms. Crystal was appointed Executive Vice President and Chief Technology
Officer on October 11, 1998. Ms. Crystal's annual salary during fiscal year
1998 was $180,000 per year. On June 30, 2000, Ms. Crystal's annual salary
was increased to $450,000 per year.
(8) Includes $112,500 accrued for the period January 1, 1998 through August 17,
1998 and $41,538 for the period October 11, 1998 through December 31, 1998.
(9) Includes $30,000 accrued for the period November 1, 1997 through December
31, 1997. Additionally, $36,750 in accrued salary for the year 1995 and
$20,769 in accrued vacation pay became due and payable on October 31,1997
when Ms. Crystal left the employment of the Company.
(10) Mr. Stafford was appointed Chief Financial Officer and a director of the
Company on October 11, 1998. Mr. Stafford's annual salary during fiscal
year 1998 was $160,000 per year.
(b) OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to option or SAR
grants during the fiscal year ended December 31, 1999 to the Named Executive
Officers.
<TABLE>
<CAPTION>
Number of Securities Percent of Total
Underlying Options Options Granted to Exercise or Base Price
Name Granted Employees in Fiscal Year ($ per Share) Expiration Date
---- -------------------- ------------------------ ---------------------- ---------------
<S> <C> <C> <C> <C>
None 0 0 --- N/A
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(c) AGGREGATED OPTION/SAR EXERCISES YEAR-END TABLE.
During the fiscal year ended December 31, 1999, none of the Named Executive
Officers exercised any options/SARs issued by Telegen. The following table sets
forth information regarding the stock options held as of December 31, 1999 by
the Named Executive Officers.
<TABLE>
<CAPTION>
Number of Securities Underlying Unexercised Value of Unexercised In-the-Money
Options at Fiscal Year End (1) Options at Fiscal Year End (1)
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jessica L. Stevens 15,323 1,711 0 0
33,338 6,667(2) 0 0
Bonnie Crystal 13,186 1,711 0 0
33,338 6,667(2) 0 0
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On June 30, 2000, the Company effected a one-for-16 reverse split of its
common stock. All options, warrants and SAR's have been retroactively
restated to reflect this reverse stock split. All options, warrants and
SAR's outstanding were subsequently cancelled on June 30, 2000, pursuant to
the Company's Plan of Reorganization.
19
<PAGE>
(2) These options represent rights to purchase shares in Telegen Display
Laboratories, Inc., a majority owned private subsidiary of the Company in
which no trading market exists. At this time, the Company believes that
these options do not have in-the-money value.
(d) COMPENSATION OF DIRECTORS
The Company's non-employee directors received (i) 356 shares of the Company's
common stock or an option to purchase 356 shares of the Company's common stock
at an exercise price equal to 100% of the fair market value per share of Common
Stock on the date of the meeting, at such directors' election, and (ii) no cash
compensation, for each meeting of the Board of Directors or a committee of the
Board of Directors attended in person, or attended by telephone. The Company
reimbursed each non-employee member of the Board of Directors and its committees
for expenses incurred by such member in connection with the attendance of such
meetings. Additionally, the Company's non-employee directors received options
under its 1996 Director Stock Option Plan. During 1999, no meetings of the
Company's Board of Directors were held.
On June 30, 2000, the Company adopted the Director Option Plan (the "2000
DOP"), under which the Company's non-employee members of the Board of
Directors (the "Outside Directors" or individually the "Outside Director")
are compensated for their service, provides for the Outside Directors to
receive an option to purchase twenty thousand (20,000) shares of the
Company's common stock on each date such Outside Director is re-elected by
the shareholders to serve another term in office. All option grants under the
2000 DOP to any Outside Director are limited to once in any given calendar
year on the date of the Shareholders' annual meeting upon their election or
re-election to the board. The exercise price of options acquired pursuant to
the 2000 DOP is 100% of the fair market value per share of Common Stock on
the date of the grant. In the event that the date of grant is not a trading
day, the exercise price per share is the fair market value on the next
trading day immediately following the date of grant of the option. All
options granted under the 2000 DOP are fully vested and exercisable upon the
date of grant and remain exercisable only while the Outside Director remains
a director of the Company and for 90 days thereafter.
The Company's directors who are also officers of the Company do not receive any
additional compensation for their services as members of the Board of Directors.
(e) EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Jessica L. Stevens ("Ms. Stevens") has an employment contract with the Company
(the "Stevens Employment Agreement"). The Stevens Employment Agreement provided
that Ms. Stevens receive an annual salary of $200,000 during her first year of
employment, with the salary in later years subject to determination by the Board
of Directors but not less than $200,000 per year. On June 30, 2000, the Board of
Directors increased Ms. Stevens' annual salary to $500,000 and granted her an
incentive stock option award of 500,000 options having an exercise price of
$1.93 and vesting ratable over the following 12 month period. Ms. Stevens is
also entitled to participate in any pension, insurance, savings or other
employee benefits adopted by the Company.
The term of the Stevens Employment Agreement is 5 years starting October 11,
1998 and provides that Ms. Stevens may not be terminated at any time during the
term of the agreement except for cause, death or disability as defined in the
agreement. If Ms. Stevens is involuntarily terminated without cause, she is
eligible for a severance package, which includes a lump sum payment based upon
the annual salary applicable at the date of termination.
Bonnie A. Crystal ("Ms. Crystal") has an employment contract with the Company
(the "Crystal Employment Agreement"). The Crystal Employment Agreement provided
that Ms. Crystal receive an annual salary of $180,000 during her first year of
employment, with the salary in later years subject to determination by the Board
of Directors but not less than $180,000 per year. On June 30, 2000, the Board of
Directors increased Ms. Crystal's annual salary to $450,000 and granted her an
incentive stock option award of 500,000 options having an exercise price of
$1.93 and vesting ratable over the following 12 month period. Ms. Crystal is
also entitled to participate in any pension, insurance, savings or other
employee benefits adopted by the Company.
The term of the Crystal Employment Agreement is 5 years starting October 11,
1998 and provides that Ms. Crystal may not be terminated at any time during the
term of the agreement except for cause, death or disability as defined in the
agreement. If Ms. Crystal is involuntarily terminated without cause, she is
eligible for a severance package, which includes a lump sum payment based upon
the annual salary applicable at the date of termination.
20
<PAGE>
William M. Swayne II ("Mr. Swayne") has an employment contract with the Company
(the "Swayne Employment Agreement"). The Swayne Employment Agreement provides
that Mr. Swayne will receive an annual salary of $400,000 during his two years
of employment, as well as an incentive bonus to be established and approved by
the Board of Directors. Mr. Swayne was also granted a signing bonus of 125,000
shares of common stock of the Company, 500,000 incentive stock options having an
exercise price of $1.75 and vesting ratable over 12 months and a warrant for
75,000 shares of common stock at an exercise price of $1.75 per share. Mr.
Swayne will also be provided with long term disability and VUL joint-life
insurance. Mr. Swayne is also entitled to participate in any pension, insurance,
savings or other employee benefits adopted by the Company.
The term of the Swayne Employment Agreement is 2 years starting July 1, 2000 and
provides that Mr. Swayne may not be terminated at any time during the term of
the agreement except for cause as defined in the agreement. If Mr. Swayne is
involuntarily terminated without cause, he is eligible for a severance package,
which includes a lump sum payment based upon the annual salary applicable at the
date of termination and immediate vesting of all options and warrants granted to
him.
Jack B. King ("Mr. King") has an employment contract with the Company (the "King
Employment Agreement"). The King Employment Agreement provides that Mr. King
will receive an annual salary of $150,000 during his two years of employment.
Mr. King was also granted a signing bonus of 25,000 shares of common stock of
the Company and 50,000 incentive stock options having an exercise price of $1.75
and vesting ratable over 24 months. Mr. King is also entitled to participate in
any pension, insurance, savings or other employee benefits adopted by the
Company.
The term of the King Employment Agreement is 2 years starting July 1, 2000 and
provides that Mr. King may not be terminated at any time during the term of the
agreement except for cause as defined in the agreement. If Mr. King is
involuntarily terminated without cause, he is eligible for a severance package,
which includes a lump sum payment based upon the annual salary applicable at the
date of termination and other fringe benefits as defined in the agreement.
Dennis Wood ("Mr. Wood") has an employment contract with the Company (the "Wood
Employment Agreement"). Mr. Wood was hired on April 1, 2000 by eTraxx
Corporation ("eTraxx"), now a subsidiary of the Company and, on July 1, 2000,
the Wood Employment Agreement with eTraxx was assigned to the Company. The Wood
Employment Agreement provides that Mr. Wood will receive an annual salary of no
less than $200,000 with annual review by the Chief Executive Officer, as well as
any incentive bonus approved by the Board of Directors. Mr. Wood was also
granted a signing bonus of 395,000 shares of common stock of eTraxx for nominal
consideration with certain buy back provisions in the case of termination. Upon
the assumption of the Wood Employment Agreement on June 30, 2000, the Company
granted Mr. Wood an incentive stock option award of 100,000 options having an
exercise price of $1.75 and vesting ratable over the following 12 month period.
Mr. Wood will also be provided with long term disability and life insurance. Mr.
Wood is also entitled to participate in any pension, insurance, savings or other
employee benefits adopted by the Company. On June 30, 2000, the Board of
Directors increased Mr. Wood's annual salary to $250,000.
The term of the Wood Employment Agreement is 2 years starting July 1, 2000 and
provides that Mr. Wood may not be terminated at any time during the term of the
agreement except for cause, death or disability as defined in the agreement. If
Mr. Wood is involuntarily terminated without cause, he is eligible for a
severance package, which includes a lump sum payment based upon the annual
salary applicable at the date of termination and other fringe benefits as
defined in the Agreement.
The Company has no change-in-control arrangements.
21
<PAGE>
(f) COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors from January 1, 1999 to
March 5, 1999 was John McMullen. Thereafter, until June 30, 2000, the
Compensation Committee did not have any members. Mr. McMullen was not at any
time during his term on the Board during the Company's 1999 fiscal year or at
any other times an officer or employee of the Company. No executive officer
of the Company serves as a member of the Board of Directors or compensation
committee of any entity that has one or more executive officers serving as a
member of the Company's Board of Directors or Compensation Committee. On
June 30, 2000, Bernard Brown, an outside director, was appointed to the
Compensation Committee.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The table below sets forth certain information regarding the beneficial
ownership of the Company's common stock as of December 31, 1999 based on
information available to the Company by (i) each person who is known by the
Company to own more than 5% of the outstanding common stock; (ii) each of the
Company's directors; (iii) each of the Named Executive Officers; and (iv) all
officers and directors of the Company as a group.
<TABLE>
<CAPTION>
Shares of Common Stock
----------------------
Five-Percent Shareholders, Directors, Executive Officers Number(1)(2) Percent
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Jessica L. Stevens(3).......................................................... 49,694 5.3%
Bonnie Crystal(4).............................................................. 24,975 2.7%
Sundance Venture Partners, L.P.(5)............................................. 49,571 5.3%
TSC LLC(5)(6).................................................................. 49,571 5.3%
Larry J. Wells(5).............................................................. 49,571 5.3%
Augustine Fund, L.P............................................................ 78,608 8.4%
Elara, Ltd.(7)................................................................. 70,313 7.5%
Triton Equities Fund L.P....................................................... 54,626 5.8%
All Directors and Executive Officers as a Group (2 persons)..................... 74,669 8.0%
--------------------------------------------------------------------------------------------------------
</TABLE>
(1) Beneficial ownership includes voting and investment power with respect to
the shares. Shares of common stock subject to options currently exercisable
or exercisable within 60 days of December 31, 1999, are deemed outstanding
for computing the percentage of the person holding such options, but are
not deemed outstanding for computing the percentage of any other person.
Thus, the sum of the individuals' ownership as a percent of common stock
beneficially owned may exceed 100%. On June 30, 2000, the Company effected
a one-for-16 reverse split of its common stock. All share data in this
table have been retroactively restated to reflect this reverse stock split.
As of December 31, 1999, Telegen had 950,360 shares of common stock
outstanding.
(2) All options, warrants and SAR's outstanding were subsequently cancelled on
June 30, 2000, pursuant to the Company's Plan of Reorganization.
(3) Jessica L. Stevens individually owns 31,214 shares of Common Stock and had
options to acquire 15,324 shares of Common Stock and a warrant to acquire
3,156 shares of Common Stock.
(4) Bonnie Crystal individually owns 11,788 shares of Common Stock and had
options to acquire 13,187 shares of Common Stock.
(5) Larry J. Wells, a former director of the Company, individually owns 13
shares of Common Stock and had options to acquire 2,683 shares of Common
Stock. Larry J. Wells is also (i) a director of Sundance Venture Partners,
L.P., which owns 12,500 shares of Common Stock and (ii) the manager for TSC
LLC, which owns 34,375 shares of Common Stock.
(6) In October 1997, TSC, LLC, a Delaware limited liability company ("TSC"),
entered into an amended and restated stock purchase agreement with Jessica
L. Stevens, an executive officer and director of the Company, for the
purchase of 12,500 shares of the Company's
22
<PAGE>
common stock in a private transaction.
(7) Elara Ltd. owns 46,875 shares of Common Stock and has a warrant to acquire
23,438 shares of Common Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
RELATED PARTY TRANSACTIONS
In April 1999, the Company issued a convertible promissory note to Bernard Brown
who had been a director of the Company from 1990 to 1995 and who became a
director again on June 30, 2000. The note was in the principal amount of
$100,000 and was due and payable upon the earliest of confirmation of a plan of
reorganization or five years from issuance and bore interest at a rate of 10%
per annum. The Company granted to Mr. Brown the option to convert the note to
shares of post reorganization common stock of the Company at the rate of one
share of post reorganization common stock for each $0.496 of indebtedness.
In April 1999, the Company signed an agreement with Jack King for referral
service in connection with the recruitment of senior management. In September
1999, the Company signed an agreement with Jack King for placement service in
connection with the 1999 Offering. Mr. King subsequently became a director of
the Company and Senior Vice President on June 30, 2000. In July 2000, Mr. King
received compensation for his referral and placement service in the form of
312,143 shares of common stock.
On November 9, 1999, the Company signed a selling agreement with WMS Financial
Planners, Inc., of Seattle, WA ("WMS Financial") and Pacific West Securities,
Inc., of Renton, WA ("Pac West"), together the Selling Agents, to conduct a
$500,000 debt offering and a $13.8 million equity offering for the Company.
William M. Swayne, who subsequently was appointed President, Chief Operating
Officer and a director of the Company on June 30, 2000, is the majority
shareholder of WMS Financial and was the President of WMS Financial and a
registered representative of Pac West. The debt offering was completed on
December 3, 1999 and cash commissions of $45,000 was paid to Pac West and $5,000
was paid to WMS Financial. The Selling Agents will also be issued 8,751 shares
of post reorganization common stock and a warrant to purchase 28,572 shares of
post reorganization common stock of the Company at a price of $1.75 per share,
exercisable until December 2002.
On December 15, 1999, the Company commenced the $13.8 million equity offering
(the "1999 Offering") of post reorganization shares of common stock of the
Company at a price of $1.75 per share. On March 10, 2000, the Company closed the
1999 Offering upon the receipt of subscriptions for 4,000,000 shares of post
reorganization common stock and gross proceeds of $7,000,000. The Selling Agents
earned a cash commission of ten percent (10%) of the gross proceeds of the 1999
Offering, or $700,000, which was subsequently paid in shares of post
reorganization common stock of the Company at a rate of one share for each $1.75
of compensation otherwise payable. In addition, the Selling Agents earned a
stock commission of three percent (3%) of the shares sold under the 1999
Offering, or 120,000 shares of post reorganization common stock of the Company.
The Selling Agents were also issued a warrant to purchase 400,000 shares of post
reorganization common stock of the Company at a price of $1.75 per share,
exercisable until March 2003.
On March 27, 2000, the Company entered into an agreement with the Selling Agents
to conduct up to three additional offerings (the "2000 Offerings") of post
reorganization common stock of the Company. The 2000 Offerings are also being
conducted pursuant to Rule 506 of Regulation D under the Act. The first tranche
of the 2000 Offerings is for 1,000,000 shares of post reorganization common
stock at $10 per share for total gross proceeds of $10,000,000. The second
tranche of the 2000 Offerings will follow completion of the first and will be
for total gross proceeds of up to $10,000,000. The third tranche of the 2000
Offerings will follow completion of the second and will be for total gross
proceeds of up to $5,000,000.
In connection with the 2000 Offerings, the Selling Agents will receive (1) a
cash commission of ten percent (10%) of the gross proceeds in cash or post
reorganization common stock priced at the offering price, at the Selling Agents'
option, (2) a three percent (3%) commission payable in post reorganization
common stock priced at the offering price and (3) a warrant to purchase, at the
offering prices, a number of shares of post reorganization common stock equal to
ten percent (10%) of the gross proceeds of the offerings, exercisable for a
period of three years from the closing of the offerings. The 2000 Offerings have
not closed and no commissions have been paid to the Selling Agents.
23
<PAGE>
On March 29, 2000, the Company completed an offering of 500,000 shares of post
reorganization common stock to a group of foreign investors (the "Regulation S
Offering") at a price of $8 per share for gross proceeds of $4,000,000. In
connection with the Regulation S Offering, the Selling Agents will receive (1) a
cash commission of two percent (2%) of the gross proceeds in cash or post
reorganization common stock priced at $8.00 per share, at the Selling Agents'
option, (2) 25,000 shares of post reorganization common stock and (3) a warrant
to purchase 50,000 of shares of post reorganization common at $8.00 per share,
exercisable for a period of three years from the closing of the Regulation S
Offering. The Regulation S Offering has not closed and no commissions have been
paid to the Selling Agents.
In January 2000, the Company agreed to grant Richard Sellers a 3 year warrant to
purchase 125,000 shares of common stock at an exercise price of $1.75 per share
in exchange for his services as Vice President of Operations for the Company.
Mr. Sellers received no cash compensation for his services and the warrant was
issued on June 30, 2000.
In January 2000, the Company agreed to grant Mark Weber a 3 year warrant to
purchase 125,000 shares of common stock at an exercise price of $1.75 per share
in exchange for his services as a marketing advisor to the Company. Mr. Weber
received no cash compensation for his services and the warrant was issued on
June 30, 2000.
On June 30, 2000, the Company granted Jessica Stevens a 5 year warrant to
purchase 1,000,000 shares of common stock at an exercise price of $1.75 per
share in exchange for certain advanced flat panel display technology previously
developed by Ms. Stevens.
On June 30, 2000, the Company granted Bonnie Crystal a 5 year warrant to
purchase 1,000,000 shares of common stock at an exercise price of $1.75 per
share in exchange for certain antenna technology previously developed by Ms.
Crystal.
On July 10, 2000, the Company loaned $60,000 to Jack King, a director and
officer of the Company, as an advance against his compensation for the next
year. Monthly payments of $10,000 taken as deductions from Mr. King's salary are
due on the loan starting on August 10, 2000, with any remaining principal and
interest due on or before January 10, 2001. The loan earns interest at the rate
of 10% per annum and is unsecured.
On July 13, 2000, the Company loaned $250,000 to WMS Financial Planners, Inc., a
company majority owned by William M. Swayne II, President and Chief Operating
Officer of the Company. The loan is due on or before January 31, 2001, earns
interest at the rate of 8% per annum and is secured by 50,000 shares of the
Company's common stock.
On March 27, 2000, the Company reached an agreement (the "Acquisition
Agreement"), subject to confirmation of the Plan of Reorganization and certain
other conditions, to purchase a controlling interest in eTraxx Corporation
("eTraxx"). eTraxx is a start-up company founded in July 1998 by executives of
the Company that will support a proprietary high speed network for the delivery
of digital content. The network is currently in development. eTraxx has raised
$600,000 in seed capital and is conducting a $5,400,000 offering of its common
stock. The acquisition is contingent upon eTraxx's successful receipt of a
minimum of $1,000,000 in its offering, confirmation of the Plan of
Reorganization, and successful receipt by the Company of a minimum of $1,000,000
in the 2000 Offering. On October 19, 2000, the Company completed the acquisition
of 63.6 % of the outstanding shares of eTraxx and issued 5,575,000 shares of the
Company's common stock in exchange to eTraxx shareholders, including 3,500,000
shares issued to Jessica Stevens, the Company's Chief Executive Officer,
1,500,000 shares issued to Bonnie Crystal, the Company's Executive Vice
President and Chief Technology Officer, 100,000 shares issued to William M.
Swayne II, the Company's President and Chief Operating Officer, 25,000 shares
issued to Dennis Wood, the Company's Chief Administrative Officer, 25,000 shares
issued to Steve Weiss, the Company's Vice President of R&D and 25,000 shares
issued to Victoria Kolakowski, the Company's Chief Patent Counsel and Vice
President.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements.
(1) Report of Independent Accountants;
24
<PAGE>
(2) Consolidated Balance Sheet of December 31, 1999;
(3) Consolidated Statement of Operations for the years ended December 31,
1999, and 1998;
(4) Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended December 31, 1999, and 1998;
(5) Consolidated Statements of Cash Flows for the years ended December 31,
1999, and 1998;
(6) Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K.
To date from January 1, 1999, the Company has filed three (3) Current Reports on
Form 8-K as follows:
(1) Current Report on Form 8-K filed with the Commission
on December 8, 2000, to report the resignation on
March 9, 1999 of the Company's independent
accountant, PricewaterhouseCoopers, LLP, and the
appointment of Singer Lewak Greenbaum & Goldstein
LLP, as the Company's auditors.
(2) Current Report on Form 8-K filed with the Commission
on December 8, 2000, to report completion of the
Company's acquisition of Telisar Corporation on
October 20, 2000.
(3) Current Report on Form 8-K/A filed with the
Commission on December 12, 2000, to amend by
reference certain reports filed with the Commission
in 1997 and 1998 with incorrect Commission File
Numbers.
(c) Exhibits.
2.2+++ Asset Purchase of TCC Agreement by and between Synercom, Inc. and
Telegen Corporation dated April 1, 1997
Certain exhibits and schedules to Exhibit 2.2 are listed on page
23 thereto and the Registrant agrees to furnish them supplementally
to the Securities and Exchange Commission upon request
3.1** Articles of Incorporation of Telegen Corporation dated August 30,
1996 [formerly known as Solar Energy Research Corp. of California]
3.2** Certificate of Amendment to the Articles of Incorporation of
Telegen Corporation dated October 28, 1996 [formerly known as Solar
Energy Research Corp. of California]
3.3* Certificate of Determination with respect to the Company's
outstanding Series A Preferred Stock filed with the California
Secretary of State on March 20, 1997
3.4** Bylaws of Telegen Corporation
3.5+++ Certificate of Amendment of Bylaws effective August 6, 1997
4.1+++ Form of Convertible Promissory Note issued by the Company in
November 1997
10.2** Agreement among Telegen Communications Corporation, Telegen Display
Laboratories, Inc., Transtech Electronics Pte, Ltd., and IPC
Corporation, Ltd., dated May 30, 1996
10.3** Manufacturing License Agreement among Telegen Communications
Corporation, Telegen Display Laboratories, Inc., Transtech
Electronics Pte, Ltd., and IPC Corporation, Ltd., dated May 30,
1996
10.4** Lease Agreement between Metropolitan Life Insurance Company and
Telegen Corporation for premises located in Foster City, California
10.5** Lease Agreement between Metropolitan Life Insurance Company and
Telegen Corporation for premises located in Redwood City, California
10.7** License and Stock Purchase Agreement by and between Telegen
Communications Corporation and Telegen Display Laboratories, Inc.
effective as of May 2, 1996
25
<PAGE>
10.8*** Shareholder Agreement between Janmil Holdings PTE LTD and
Telegen Communications Corporation dated June 4, 1997
10.9* Subscription Agreement for 8% Convertible Preferred Stock of
Telegen Corporation dated March 24, 1997
10.10** Amendment Agreement to 8% Convertible Preferred Stock of
Telegen Corporation dated July 22, 1997
10.11+++ Form of Subscription Agreement for the Company's Common Stock
financing August 1997
10.12+++ Form of Subscription Agreement for the Company's Common Stock
and Warrant Financing October, 1997
10.13+++ Form of Subscription Agreement for the Company's Convertible
Note and Warrant Financing November, 1997
10.14+++ Form of $2.25 Warrant issued to certain purchasers in the
Common Stock Financing August, 1997
10.15+++ Form of $4.00 Warrant to Purchase Common Stock issued by the
Company to certain purchasers in the Common Stock and Warrant
Financing October, 1997
10.16+++ Form of $0.01 Warrant to Purchase Common Stock issued to certain
purchasers in the Common Stock and Warrant Financing October,
1997
10.17+++ Form of $2.25 Warrant to Purchase Common Stock issued by the
Company to certain purchasers in the Convertible Note and
Warrant Financing November, 1997
10.18+++ Employment Agreement by and between the Company and Jessica
L. Stevens dated May 3, 1990
10.19+++ Employment Agreement by and between the Company and Bonnie
Crystal dated May 4, 1990
10.20+++ Employment Agreement by and between the Company and Warren M.
Dillard dated November 1, 1993
10.21+++ Employment Agreement by and between the Company and Fred Y.
Kashkooli dated October 31, 1997
10.22+++ Exchange Offer Agreement by and between the Company and certain
holders of Common Stock dated March 24, 1998
10.23**** Note and Warrant Purchase Agreement dated April 1998
10.24**** Form of $500,000 Convertible Promissory Note issued by the
Company in April 1998
10.25**** Form of $6.08 Warrant to Purchase $500,000 of Common Stock
issued by the Company to certain purchasers in the Convertible
Note and Warrant Financing April 1998
10.26**** Note and Warrant Purchase Agreement dated May 1998
10.27**** Form of $515,532 Convertible Promissory Note issued by the
Company in May 1998
10.28**** Form of $6.08 Warrant to Purchase 1,356,633 shares of Common
Stock issued by the Company to certain purchasers in the
Convertible Note and Warrant Financing May 1998
10.29**** Form of the Satisfaction and Release Agreement issued the
Company to an individual in July 1998
10.30**** Form of $225,000 Convertible Promissory Note issued by the
Company to an individual in July 1998
10.31**** Employment Agreement by and between the Company and Jessica L.
Stevens dated October 13, 1998
10.32**** Employment Agreement by and between the Company and Bonnie
Crystal dated October 13, 1998
26
<PAGE>
10.33 Form of $100,000 Convertible Promissory Note issued by the
Company to Bernard Brown in April 1999
10.34 Selling Agreement by and between the Company and WMS Financial
Planners, Inc., and Pacific West Securities, Inc. dated
November 9, 1999
10.35 Selling Agreement by and between the Company and WMS Financial
Planners, Inc., and Pacific West Securities, Inc. dated
March 8, 2000
10.36 Selling Agreement by and between the Company and WMS Financial
Planners, Inc., and Pacific West Securities, Inc. dated
March 20, 2000
10.37 Form of the $1.75 Warrant to purchase 28,572 shares of Common
Stock issued by the Company to WMS Financial Planners, Inc.,
and Pacific West Securities, Inc. dated December 3, 1999
10.38 Form of the $1.75 Warrant to purchase 400,000 shares of Common
Stock issued by the Company to WMS Financial Planners, Inc.,
and Pacific West Securities, Inc. dated June 30, 2000
10.39 Form of $500,000 in Convertible Promissory Notes issued by the
Company to certain investors in December 1999
10.40 Form of the $1.75 Warrant to purchase 1,000,000 shares of
Common Stock issued by the Company to Jessica L. Stevens dated
June 30, 2000
10.41 Form of the $1.75 Warrant to purchase 1,000,000 shares of
Common Stock issued by the Company to Bonnie Crystal dated
June 30, 2000
10.42 Form of the $1.75 Warrant to purchase 125,000 shares of Common
Stock issued by the Company to Richard Sellers dated
July 1, 2000
10.43 Form of the $1.75 Warrant to purchase 125,000 shares of Common
Stock issued by the Company to Mark Weber dated July 1, 2000
10.44 Regulation S Securities Purchase Agreement by and between the
Company and certain foreign investors executed in April 2000
10.45 Employment Agreement by and between the Company and William M.
Swayne II dated July 1, 2000
10.46 Employment Agreement by and between the Company and Jack King
dated July 1, 2000
10.47 Employment Agreement by and between eTraxx Corporation and
Dennis Wood dated April 1, 2000 and assigned to the Company on
July 1, 2000
10.48 Assignment and Amendment of Employment Agreement by and
between Dennis Wood, eTraxx Corporation and the Company dated
July 1, 2000
10.49 Form of $60,000 Promissory Note from Jack King to the Company
dated July 10, 2000
10.50 Form of $250,000 Promissory Note from WMS Financial Planners,
Inc. to the Company dated July 13, 2000
10.51 Placement Agreement between the Company and Jack King dated
September 10, 1999
10.52 Recruiting Agreement between the Company and Jack King dated
April 26, 1999
27
<PAGE>
11.1+++ Statement Re Computation of Per Share Earnings
12.1+++ Statement Re Computation of Ratios
21.1 Subsidiaries of Registrant
24.1++++ Power of Attorney
27.1 Financial Data Schedule
* Incorporated by reference herein to the Form 8-K filed by the Registrant on
January 15, 1998
** Incorporated by reference herein to the Form 10-K filed by the Registrant
on March 31, 1997 and amended on April 9 and April 30, 1997
*** Incorporated by reference herein to the Form 8-K filed by the Registrant on
July 8, 1997
**** Incorporated by reference herein to the Form 10-KSB filed by the Registrant
on December 8, 2000
+ Incorporated by reference herein to the Form 8-K filed by the Registrant on
March 25, 1997
++ Incorporated by reference herein to the Form 8-K filed by the Registrant on
August 11, 1997
+++ Incorporated by reference herein to the Form 10-K filed by the Registrant
on April 15, 1998
++++ Incorporated by reference in the signature page herein.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TELEGEN CORPORATION
(Registrant)
Dated: December 11, 2000 By: /s/ JESSICA L. STEVENS
-----------------------------------
Jessica L. Stevens
Chief Executive Officer
Date: December 11, 2000
POWER OF ATTORNEY
28
<PAGE>
Know all persons by these presents that each person whose signature appears
below constitutes and appoints Jessica L. Stevens, as his or her
attorney-in-fact, with full power of substitution, for him or her in any and all
capacities, to sign any amendments to this Report on Form 10-KSB, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission.
In accordance with the Securities Exchange Act of 1934, this Report on Form
10-KSB has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ JESSICA L. STEVENS Chair of the Board December 11, 2000
------------------------------ ------------
Jessica L. Stevens
/s/ BONNIE CRYSTAL Director December 11, 2000
------------------------------ ------------
Bonnie Crystal
/s/ WILLIAM M. SWAYNE Director December 11, 2000
------------------------------ ------------
William M. Swayne
/s/ JACK KING Director December 11, 2000
------------------------------ ------------
Jack King
/s/ BERNARD BROWN Director December 11, 2000
------------------------------ ------------
Bernard Brown
</TABLE>
29
<PAGE>
TELEGEN CORPORATION AND SUBSIDIARIES
CONTENTS
DECEMBER 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheet F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Shareholders' Deficit F-4
Consolidated Statements of Cash Flows F-5 - F-6
Notes to Consolidated Financial Statements F-7 - F-25
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Telegen Corporation and subsidiaries
We have audited the accompanying consolidated balance sheet of Telegen
Corporation and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, shareholders' deficit, and cash flows for
each of the two years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Telegen Corporation
and subsidiaries as of December 31, 1999, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, during the year ended December 31, 1999, the
Company incurred a net loss of $1,163,774, its current liabilities exceeded its
current assets by $4,617,256, it had negative cash flows from operations of
$303,755, and it had an accumulated deficit of $27,790,874. These factors, among
others, as discussed in Note 2 to the consolidated financial statements, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
August 25, 2000
F-1
<PAGE>
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
--------------------------------------------------------------------------------
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash $ 309,359
Deferred offering costs 45,833
----------------
Total current assets 355,192
PROPERTY AND EQUIPMENT, net 274,178
OTHER ASSETS 3,000
----------------
TOTAL ASSETS $ 632,370
================
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Bankruptcy liability $ 3,557,791
Post petition liability 801,557
Convertible notes payable 600,000
Note payable - shareholder 13,100
----------------
Total current liabilities 4,972,448
----------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Preferred stock, $1 par value, $1,000 liquidation preference
15,000 shares authorized
no shares issued and outstanding -
Common stock, no par value
100,000,000 shares authorized
950,360 shares issued and outstanding 23,450,796
Accumulated deficit (27,790,874)
----------------
Total shareholders' deficit (4,340,078)
----------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 632,370
================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
REVENUES
Sales of products $ - $ 57,900
COST OF GOODS SOLD - 264,578
--------------- ----------------
GROSS LOSS - (206,678)
--------------- ----------------
OPERATING EXPENSES
Selling and marketing 45,000 147,853
Research and development 55,928 537,760
General and administrative 1,080,171 2,659,374
--------------- ----------------
Total operating expenses 1,181,099 3,344,987
--------------- ----------------
LOSS FROM OPERATIONS (1,181,099) (3,551,665)
--------------- ----------------
OTHER INCOME (EXPENSE)
Interest income - 23
Interest expense - (1,115,493)
Other income 12,137 11,311
Net gain (loss) on sale of assets 5,988 (335,748)
--------------- ----------------
Total other income (expense) 18,125 (1,439,907)
--------------- ----------------
LOSS BEFORE PROVISION FOR INCOME TAXES (1,162,974) (4,991,572)
PROVISION FOR INCOME TAXES 800 800
--------------- ----------------
NET LOSS $ (1,163,774) $ (4,992,372)
=============== ================
BASIC AND DILUTED LOSS PER SHARE ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ (1.23) $ (6.97)
=============== ================
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 949,081 716,715
=============== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------------------- --------------------------------
Shares Amount Shares Amount
---------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 - $ - 514,688 $ 20,164,976
ISSUANCE OF COMMON STOCK FOR
Employee services 75 6,000
Exercise of employee stock options 15 1,190
Exercise of warrants 49,598 301,553
Employee stock purchase plan 405 3,956
Conversion of convertible notes 383,478 1,958,532
EXCHANGE OF RESTRICTED COMMON STOCK FOR CONVERTIBLE
NOTES PAYABLE (95,137) (707,992)
CONVERSION OF CONVERTIBLE NOTES PAYABLE INTO
UNRESTRICTED COMMON STOCK 87,708 622,591
WARRANTS ISSUED AS OFFERING COSTS FOR CONVERTIBLE NOTES
PAYABLE 51,553
INTEREST FROM FIXED CONVERSION FEATURES 983,437
NET LOSS
--------------- ---------------- --------------- --------------
BALANCE, DECEMBER 31, 1998 - - 940,830 23,385,796
CONVERSION OF CONVERTIBLE NOTES PAYABLE
INTO UNRESTRICTED COMMON STOCK 9,530 15,000
WARRANTS ISSUED AS OFFERING COSTS FOR CONVERTIBLE NOTES
PAYABLE 50,000
NET LOSS
--------------- ---------------- --------------- --------------
BALANCE, DECEMBER 31, 1999 - $ - 950,360 $ 23,450,796
=============== ================ =============== ==============
Accumulated
Deficit Total
--------------- -------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1997 $ (21,634,728) $ (1,469,752)
ISSUANCE OF COMMON STOCK FOR
Employee services 6,000
Exercise of employee stock options 1,190
Exercise of warrants 301,553
Employee stock purchase plan 3,956
Conversion of convertible notes 1,958,532
EXCHANGE OF RESTRICTED COMMON STOCK FOR CONVERTIBLE
NOTES PAYABLE (707,992)
CONVERSION OF CONVERTIBLE NOTES PAYABLE INTO
UNRESTRICTED COMMON STOCK 622,591
WARRANTS ISSUED AS OFFERING COSTS FOR CONVERTIBLE NOTES
PAYABLE 51,553
INTEREST FROM FIXED CONVERSION FEATURES 983,437
NET LOSS (4,992,372) (4,992,372)
--------------- --------------
BALANCE, DECEMBER 31, 1998 (26,627,100) (3,241,304)
CONVERSION OF CONVERTIBLE NOTES PAYABLE
INTO UNRESTRICTED COMMON STOCK 15,000
WARRANTS ISSUED AS OFFERING COSTS FOR CONVERTIBLE NOTES
PAYABLE 50,000
NET LOSS (1,163,774) (1,163,774)
--------------- --------------
BALANCE, DECEMBER 31, 1999 $ (27,790,874) $ (4,340,078)
=============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,163,774) $ (4,992,372)
Adjustments to reconcile net loss to net cash
used in operating activities
Loss on disposal of assets - 335,738
Depreciation and amortization 159,719 367,422
Amortization of deferred financing costs 4,167 -
Stock issued for employee services - 6,000
Warrants issued as offering costs - 51,553
Interest from fixed conversion features - 983,437
(Increase) decrease in
Accounts receivable - 21,859
Prepaid expenses and other current assets - 17,664
Deposits (3,000) -
Increase (decrease) in
Accrued payroll and payroll taxes 515,464 289,455
Accounts payable 183,669 601,175
Deferred rent - (13,039)
---------------- -----------------
Net cash used in operating activities (303,755) (2,331,108)
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of property and equipment - 350,000
--------------- ----------------
Net cash provided by investing activities - 350,000
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from convertible notes payable 600,000 1,398,532
Proceeds from notes payable - shareholder 13,100 -
Employee stock purchase plan - 3,956
Exercise of stock options - 1,190
Exercise of warrants - 301,553
--------------- ----------------
Net cash provided by financing activities 613,100 1,705,231
--------------- ----------------
Net increase (decrease) in cash 309,345 (275,877)
CASH, BEGINNING OF YEAR 14 275,891
--------------- ----------------
CASH, END OF YEAR $ 309,359 $ 14
=============== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
INTEREST PAID $ - $ 132,056
=============== ================
INCOME TAXES PAID $ - $ 800
=============== ================
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 1999, the Company completed the following:
- Issued 9,530 shares of common stock for the conversion of $15,000 of
notes payable.
- Issued 28,576 warrants with an exercise price of $1.75 for offering
costs valued at $50,000 related to 10 convertible promissory notes
issued on December 3, 1999.
During the year ended December 31, 1998, the Company completed the following:
- Exchanged an aggregate of 95,137 restricted shares of common stock for
convertible notes payable valued at $707,992.
- Issued an aggregate of 87,708 unrestricted shares of common stock upon
the conversion of certain convertible notes payable valued at $622,591.
- Issued an aggregate of 383,478 restricted shares of common stock in
connection with the conversion of various convertible notes payable
totaling $1,958,532.
- Issued 405 shares of common stock in connection with an employee stock
plan totaling $3,956.
- As part of the filing of a voluntary petition under Chapter 11 of the
United States Bankruptcy Code on October 28, 1998, the Company
reclassified the following assets and liabilities into a bankruptcy
liability:
<TABLE>
<S> <C>
Accounts receivable $ 206,380
Property and equipment 147,581
Other assets 75,182
Accounts payable (2,164,293)
Accrued payroll (1,159,063)
Accrued expenses (99,095)
Deferred rent (33,936)
Dividend payable (145,146)
Convertible notes payable (85,401)
Equity put option (300,000)
----------------
TOTAL BANKRUPTCY LIABILITY $ 3,557,791
================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
TELEGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
--------------------------------------------------------------------------------
NOTE 1 - BUSINESS AND ORGANIZATION
Telegen Corporation ("Telegen"), a California publicly-traded
corporation, is a diversified, high technology company with products,
both developed and in development, in the flat panel display,
telecommunications, and Internet hardware markets. Currently, Telegen
is actively developing its flat panel display technology.
On October 28, 1996, Telegen acquired all the issued and outstanding
shares of a California corporation which was formed on May 3, 1990 and
which at the time was named Telegen Corporation, and, simultaneously,
the name of the acquired corporation was changed to Telegen
Communications Corporation ("TCC"). For accounting purposes, the
transaction has been treated as a recapitalization of TCC, with TCC as
the accounting acquirer (reverse acquisition), and has been accounted
for in a manner similar to a pooling of interests. The operations of
Telegen have been included with those of TCC from the acquisition date.
Telegen was incorporated in California on August 30, 1996. Telegen had
minimal assets and liabilities at the date of the acquisition and did
not have significant operations prior to the acquisition. Therefore, no
pro forma information is presented.
Prior to the reverse merger, on April 12, 1996, the corporation which
became TCC formed a wholly owned subsidiary named Telegen Display
Laboratories, Inc. ("TDL"). As of May 1, 1996, TCC received all the
issued and outstanding shares of common stock of TDL in exchange for a
technology license. (Telegen, TCC, and TDL are known collectively as
the "Company").
During the year ended December 31, 1997, the Company sold its interest
in Morning Star MultiMedia, Inc. ("Morning Star"). The Company had
acquired Morning Star during 1996 through a pooling of interests,
whereby all of the outstanding stock of Morning Star was exchanged for
shares of the Company. Morning Star creates and supplies interactive
CD-ROM and Internet-based entertainment and infotainment software.
F-7
<PAGE>
NOTE 2 - FILING FOR BANKRUPTCY PROTECTION UNDER CHAPTER 11
On October 28, 1998 (the "Filing Date"), the Company filed a voluntary
petition (the "Chapter 11 Case") under Chapter 11 of the United States
Bankruptcy Code (Case No. 98-34876-DM-11) in the United States
Bankruptcy Court for the District of California (the "Bankruptcy
Court"). On April 22, 2000, the Company filed its plan of
reorganization and related disclosure statements with the Bankruptcy
Court. On May 26, 2000, the Bankruptcy Court approved as adequate the
Disclosure Statement, thereby enabling the Company to solicit votes on
the plan of reorganization from the Company's creditors and
shareholders. From the Filing Date until the effective date, the
Company operated its business as a debtor-in-possession, subject to the
jurisdiction of the Bankruptcy Court. During such time, all claims
against the Company in existence prior to the Filing Date were stayed
and have been classified as a bankruptcy liability in the consolidated
balance sheet.
On June 28, 2000, the Company's Second Amended Plan of Reorganization
(the "Plan of Reorganization") was confirmed and became effective on
June 30, 2000. The Plan of Reorganization also affects the debtor's
subsidiaries, Telegen Communications Corporation, and Telegen Display
Laboratories, Inc. All options and warrants outstanding were
subsequently canceled pursuant to the Plan of Reorganization and have
been reflected as such in the financial statements as of the Filing
Date.
At December 31, 1999, the bankruptcy liability was comprised of the
following:
<TABLE>
<S> <C>
Secured liabilities payable $ 441,812
Priority tax claims 37,218
Accounts payable to unsecured creditors 3,078,761
----------------
TOTAL $ 3,557,791
================
</TABLE>
NOTE 3 - GOING CONCERN MATTERS
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles which contemplate
continuation of the Company as a going concern. However, during the
year ended December 31, 1999, the Company incurred a net loss of
$1,163,774, its current liabilities exceeded its current assets by
$4,617,256, it had negative cash flows from operations of $303,755, and
it had an accumulated deficit of $27,790,874. In addition, on October
28, 1998, the Company filed a voluntary petition under Chapter 11 of
the United States Bankruptcy Code. These factors raise substantial
doubt about the Company's ability to continue as a going concern.
F-8
<PAGE>
Recovery of the Company's assets is dependent upon future events, the
outcome of which is indeterminable. The Company's attainment of
profitable operations is dependent upon the Company obtaining adequate
debt and equity financing and achieving a level of sales adequate to
support the Company's cost structure. In addition, realization of a
major portion of the assets in the accompanying balance sheet is
dependent upon the Company's ability to meet its financing requirements
and the success of its plans to sell its products. The financial
statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts
and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
Management plans to raise additional equity capital, continue to
develop its products, and look for merger or acquisition candidates. In
addition, on June 28, 2000, the Company's Plan of Reorganization was
confirmed by the United States Bankruptcy Court.
NOTE 4 - SALE OF ASSETS
SYNERCOM, INC.
On April 1, 1998, Synercom, Inc. purchased certain assets valued at
$207,584 from the Company in exchange for cash of $350,000, a note
receivable of $150,000 and the rights to royalty streams on certain
Company products for up to three years. The Company has recorded a gain
on the sale of the assets of $292,416. The note receivable was due in
six installments of $25,000 each plus interest of 6% commencing on
September 15, 1998. Subsequently, Synercom, Inc. defaulted on the note
receivable. The Company recorded an allowance for uncollectibility of
$150,000 as of December 31, 1998. Synercom, Inc. was owned by a former
attorney for the Company and a former officer/director.
NOTE 5 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Telegen
and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
F-9
<PAGE>
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements. Such estimates affect the reported
amounts of revenues and expenses during the reported period. Actual
results could materially differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
Company's financial instruments, including cash, convertible notes
payable, and notes payable - shareholder, the carrying amounts
approximate fair value due to their short maturities.
CASH
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with original maturities of three
months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Company provides for
depreciation and amortization using the straight-line method over the
estimated useful life of five to seven years. Expenditures for
maintenance and repairs are charged to operations as incurred while
renewals and betterments are capitalized. Gains or losses on the sale
of furniture and equipment are reflected in the statements of
operations.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of the
assets to future net cash flows expected to be generated by the assets.
If the assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
exceeds the fair value of the assets. To date, no such impairment has
occurred.
STOCK SPLIT
On June 30, 2000, the Company effected a one-for-16 reverse split of
its common stock. All share and per share data have been retroactively
restated to reflect this reverse stock split.
F-10
<PAGE>
STOCK OPTIONS
During 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," which defines a fair value
based method of accounting for stock-based compensation. However, SFAS
No. 123 allows an entity to continue to measure compensation cost
related to stock and stock options issued to employees using the
intrinsic method of accounting prescribed by Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." Entities electing to remain with the accounting method of
APB 25 must make pro forma disclosures of net loss and loss per share
as if the fair value method of accounting defined in SFAS No. 123 had
been applied. The Company has elected to account for its stock-based
compensation to employees under APB 25.
LOSS PER SHARE
The Company calculates loss per share in accordance with SFAS No. 128,
"Earnings per Share." Basic loss per share is computed by dividing loss
available to common shareholders by the weighted-average number of
shares of common stock outstanding. Diluted loss per share is computed
similar to basic loss per share except that the denominator is
increased to include the number of additional shares of common stock
that would have been outstanding if the potential common shares had
been issued and if the additional common shares were dilutive. Because
the Company has incurred net losses, basic and diluted loss per share
are the same.
COMPREHENSIVE INCOME
The Company utilizes SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting comprehensive income
and its components in a financial statement. Comprehensive income as
defined includes all changes in equity (net assets) during a period
from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include
foreign currency translation adjustments and unrealized gains and
losses on available-for-sale securities. Comprehensive income is not
presented in the Company's financial statements since the Company did
not have any of the items of comprehensive income in any period
presented.
F-11
<PAGE>
INCOME TAXES
The Company accounts for income taxes under the asset and liability
method of accounting. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
A valuation allowance is required when it is less likely than not that
the Company will be able to realize all or a portion of its deferred
tax assets.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1999, the FASB adopted SFAS No. 135, "Rescission of FASB
Statement No. 75 and Technical Corrections," which is effective for
financial statements with fiscal years beginning after February 15,
1999. This statement is not applicable to the Company.
In June 1999, the FASB issued SFAS No. 136, "Transfer of Assets to a
Not-for-Profit Organization or Charitable Trust that Raises or Holds
Contributions for Others." This statement is not applicable to the
Company.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities." The Company does not expect
adoption of SFAS No. 137 to have a material impact, if any, on its
financial position or results of operations.
In June 2000, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 138, "Accounting for Certain Instruments and Certain Hedging
Activities." This statement is not applicable to the Company.
In June 2000, the FASB issued SFAS No. 139, "Rescission of FASB
Statement No. 53 and Amendments to Statements No. 63, 89, and 121."
This statement is not applicable to the Company.
F-12
<PAGE>
NOTE 6 - CASH
The Company maintains cash deposits at banks located in California.
Deposits at each bank are insured by the Federal Deposit Insurance
Corporation up to $100,000. As of December 31, 1999, the uninsured
portions of these balances held at the banks aggregated to $219,258.
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 consisted of the following:
<TABLE>
<S> <C>
Automobile $ 9,100
Machinery and equipment 585,938
Furniture and fixtures 495,020
Capital lease obligations 16,611
----------------
1,106,669
Less accumulated depreciation and amortization 832,491
----------------
TOTAL $ 274,178
================
</TABLE>
NOTE 8 - POST PETITION LIABILITY
Post petition liability at December 31, 1999 consisted of the
following:
<TABLE>
<S> <C>
Accrued payroll $ 609,902
Accrued expenses 191,655
----------------
TOTAL $ 801,557
================
</TABLE>
NOTE 9 - CONVERTIBLE NOTES PAYABLE
On April 9, 1999, the Company entered into a convertible promissory
note for $100,000 with a former director. The note bears interest at
10% per annum and is due five years from the date of the note. The
holder has the option, in lieu of repayment in cash, to convert, in
whole or in part, any portion of the outstanding principal or interest
into shares of common stock at a conversion price of $0.496 per share.
F-13
<PAGE>
On December 3, 1999, the Company issued convertible promissory notes to
10 investors for an aggregate of $500,000. The notes bore interest at
15% per annum and were due the earlier of (i) one year from the date of
the note or (ii) the effective date under a plan or reorganization that
is confirmed in Chapter 11 Case No. 98-34876-DM-11. Upon confirmation
of the plan by the court, the holder shall have the option, in lieu of
repayment in cash, to convert, in whole or in part, any portion of the
outstanding principal or interest on the note into shares of common
stock at a conversion price of $1.40 per share. The Company incurred
offering costs of cash for $50,000, 8,571 shares of common stock valued
at $15,000, and warrants to purchase 28,572 shares of common stock
valued at $50,000. The warrants have an exercise price of $1.75, vest
immediately, and expire in December 2002. The warrants are being
amortized as offering costs over the term of the convertible promissory
notes.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its office facilities on a month-to-month basis.
Rent expense was $0 and $244,075 for the years ended December 31, 1999
and 1998, respectively.
EMPLOYMENT AGREEMENTS
On October 13, 1998, the Company entered into two employment agreements
with its Chief Executive Officer and Chief Technology Officer for terms
of five years. Under the terms of the agreements, these officers will
receive a total annual salary of $380,000, with the option to convert
any portion of accrued salary into the Company's common stock at a rate
of 20% below price offered in the Company's first equity financing.
That financing was the December 1999 offering at $1.75 per share.
Accordingly, these officers are entitled to convert their deferred
salary at $1.40 per share.
LITIGATION
The Company was involved in litigation with its former landlord for
delinquency in lease payments. In January 2000, the parties entered
into an agreement to settle the litigation, which reduced an unsecured
claim in the bankruptcy of $250,000, and the Company accepted a $75,000
administrative claim from the lease company to cover all post petition
costs incurred by the lease company.
F-14
<PAGE>
Shortly after the formation of TDL, a joint venture company acquired a
10% equity interest in TDL for $5,000,000. Along with its investment in
TDL, the venture company acquired an option to purchase licenses to
build up to four flat-panel display production plants. In January 1998,
the venture company filed suit against Telegen, TDL, and certain
current and former officers and directors of Telegen. In September
1999, the bankruptcy court approved a settlement which satisfactorily
resolved the litigation with each party denying any liability, return
of the 10% interest in TDL to Telegen, termination of the plant
licenses, and a payment of insurance proceeds by Telegen's directors'
and officers' insurers to the venture company at no cost to Telegen or
the other defendants.
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 not have a material adverse effect on the Company's
financial position, results of operations, and cash flows.
NOTE 11 - SHAREHOLDERS' DEFICIT
WARRANTS
In May 1998, the Company issued a warrant certificate as commission for
placement services valued at $51,553 to a securities company for
warrants to purchase 8,479 shares of common stock at an exercise price
of $6.08 per share. On July 29, 1998, the warrants were exercised for
total consideration of $51,553.
The following summarizes the warrant transactions:
<TABLE>
<CAPTION>
Weighted-
Average
Warrants Exercise
Outstanding Price
--------------- ----------------
<S> <C> <C>
Outstanding, December 31, 1997 76,818 $ 51.36
Granted 134,389 $ 6.08
Exercised (49,598) $ 6.08
Forfeited/cancelled (161,609) $ 27.68
---------------
Outstanding, December 31, 1998 - $ -
Granted 28,576 $ 1.75
---------------
OUTSTANDING, DECEMBER 31, 1999 28,576 $ 1.75
===============
EXERCISABLE, DECEMBER 31, 1999 28,576 $ 1.75
===============
</TABLE>
F-15
<PAGE>
COMMON STOCK EXCHANGE OFFER
On March 19, 1998, the Company made available to the Common Investors
and Unit Investors (the "Investors") an exchange offer (the "Exchange
Offer") for the common stock purchased. Under the Exchange Offer, the
Investors were offered convertible subordinated promissory notes (the
"Notes") for their shares of subscription common stock with a face
value equal to the number of shares of common stock tendered under the
Exchange Offer multiplied by the five-day average of the Company's
closing trading prices on the Over-the-Counter Bulletin Board prior to
March 17, 1998 (the "Conversion Price").
The Notes had a one-year term with a 6% balloon interest payment due at
the end of the term of the Notes. The Notes were subordinated to all
other existing debt of the Company, both as to interest and principal
and upon liquidation. The Notes were also convertible into registered
shares of common stock at any time by a holder, such number of shares
of common stock to be determined by dividing the amount of the face
value of the Note tendered by the Conversion Price. The Company could
prepay the Notes at any time after giving 15 days prior written notice
to the holders.
The Exchange Offer was extended to certain holders of the Company's
unregistered common stock in order to allow them to exchange their
common shares for shares of convertible preferred stock or convertible
debt. The holders were from the August and October Private Placements,
along with two additional individual investors. As of December 31,
1999, none of the holders exchanged their common shares for convertible
preferred stock.
CONVERTIBLE NOTES
On April 1, 1998, the Company issued a convertible promissory note for
$500,000 at a conversion price of $6.08 per share and a warrant to
purchase $500,000 worth of shares of the Company's common stock at the
same conversion price. The note was due on April 1, 1999 and bore
interest at 6% per annum. The Company recorded a financing charge of
$526,315, representing the difference between the $6.08 conversion
price of the note and the Company's stock price of $12.48 on the
issuance date. Such costs were charged to interest expense during the
year ended December 31, 1998 when the note first became eligible for
conversion. As of December 31, 1998, the note was converted into 82,237
shares of common stock, and the warrants were converted into 41,118
shares of common stock.
F-16
<PAGE>
On April 1, 1998, the Company issued another convertible promissory
note for $50,000 at a conversion price of $6.08 per share as a
commission in connection with placement services relating to other
convertible notes. The note was due on April 1, 1999 and bore interest
at 6% per annum. The Company recorded a financing charge of $52,632,
representing the difference between the $6.08 conversion price of the
note and the Company's stock price of $12.48 on the issuance date. Such
costs were charged to interest expense during the year ended December
31, 1998 when the note first became eligible for conversion. As of
December 31, 1998, the note was converted into 8,224 shares of common
stock.
On April 23, 1998, the Company issued two additional convertible notes
totaling $33,516, which have the same terms as the March 19, 1998
notes. The Company recorded a financing charge of $38,191, representing
the difference between the $6.08 conversion price of the note and the
Company's stock price of $13.01 on the issuance date. Such costs were
charged to interest expense during the year ended December 31, 1998
when the note first became eligible for conversion. As of December 31,
1998, the entire debt was converted into 5,625 shares of common stock.
On May 7, 1998, the Company issued a convertible promissory note for
$515,532 at a conversion price of $6.08 per share and a warrant to
purchase 84,791 shares of the Company's common stock at the same price.
The note was due on May 8, 1999 and bore interest at 6% per annum. The
Company recorded a financing charge of $322,299, representing the
difference between the $6.08 conversion price of the note and the
Company's stock price of $10.40 on the issuance date. Such costs were
charged to interest expense during the year ended December 31, 1998
when the note first became eligible for conversion. As of December 31,
1998, the note was converted into 84,791 shares of common stock. The
Company also issued 8,479 warrants at an exercise price of $6.08 per
share as a commission for placement services valued at $51,553. These
warrants were exercised during the year ended December 31, 1998 for
proceeds of $51,553.
In July 1998, the Company entered into a Satisfaction and Release
Agreement in satisfaction of all debts to one individual. The Company
issued a convertible promissory note valued at $225,000, which was
convertible at $6.08 per share in the same month. As of December 31,
1998, the note was converted into 37,000 shares of common stock.
EMPLOYEES
In January 1998, the Company issued 75 shares of common stock valued at
$6,000 to a former employee for past services.
F-17
<PAGE>
In February 1998, the Company granted an officer of the Company an
incentive stock option to purchase 17,500 shares of the Company's
common stock under the 1996 Stock Option Plan at an exercise price of
$6.88 and an option to purchase 27,500 shares of the Company's common
stock at an exercise price of $6.88 outside of the 1996 Stock Option
Plan in satisfaction of his employment contract with the Company. None
of the options had been exercised when the officer resigned on October
1, 1998, at which time all of the stock options were cancelled.
In May 1998, an employee exercised stock options to purchase 15 shares
of common stock at an exercise price of $5 per share.
STOCK PURCHASE INCENTIVE PLAN
In October 1996, the Company adopted the 1996 Stock Purchase Incentive
Plan to provide additional incentive to employees and consultants of
the Company. On June 29, 1998, several employees were issued a total of
405 shares of common stock valued at $3,956. The Company is readopting
the 1996 Stock Purchase Incentive Plan and renaming it the 2000 Stock
Purchase Incentive Plan.
STOCK OPTION INCENTIVE PLAN
The Company adopted the 1996 Stock Option Incentive Plan (the "Option
Plan") in October 1996 to provide additional incentives to the
employees and consultants of the Company. The Company is readopting the
Option Plan and renaming it the 2000 Stock Incentive Plan.
Under the Option Plan, options granted are not incentive stock options
as defined in Section 422 of the Internal Revenue Code of 1986, as
amended. The specific terms of each option grant are approved by the
Board of Directors and reflected in a written stock option agreement
between the Company and each grantee. Generally, the options are for a
term of no more than five years at an exercise price no less than the
fair market value of the Company's common stock as determined by the
Board of Directors at the time of option grant. Common stock may also
be granted or sold under the Option Plan independent of any option
grant.
The Company reserved 200,000 shares of its common stock for issuance
under the Option Plan. All unexercised options under the Option Plan
prior to the filing of the Chapter 11 Case were cancelled under the
Plan of Reorganization (see Note 2). As of December 31, 1999, no
options have been granted under the Option Plan after the filing of the
Chapter 11 Case.
F-18
<PAGE>
The following summarizes the stock option transactions under the stock
option plans:
<TABLE>
<CAPTION>
Weighted-
Average
Stock Options Exercise
Outstanding Price
--------------- ----------------
<S> <C> <C>
Outstanding, December 31, 1997 86,595 $ 75.36
Granted 45,000 $ 6.88
Exercised (15) $ 80.00
Forfeited/cancelled (131,580) $ 71.68
---------------
OUTSTANDING, DECEMBER 31, 1998 AND
1999 - $ -
===============
EXERCISABLE, DECEMBER 31, 1999 - $ -
===============
</TABLE>
There were 200,000 options available for future grant at December 31,
1999.
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost other than that required to be
recognized by APB 25 for the difference between the fair value of the
Company's common stock at the grant date and the exercise price of the
options has been recognized. Had compensation cost for the Company's
stock option plan been determined based on the fair value at the grant
date for awards consistent with the provisions of SFAS No. 123, the
Company's net loss and loss per share for the years ended December 31,
1999 and 1998 would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
Net loss as reported $ (1,163,774) $ (4,992,372)
Net loss, pro forma $ (1,163,774) $ (4,992,372)
Basic loss per share as reported $ (1.22) $ (6.93)
Basic loss per share, pro forma $ (1.22) $ (6.93)
</TABLE>
The fair value of these options was estimated at the date of grant
using the minimum value method with the following weighted-average
assumptions for the years ended December 31, 1999 and 1998: dividend
yields of 0% and 0%, respectively; risk-free interest rates of 0.0% and
4.7%, respectively; and expected lives of five and five years,
respectively. The weighted-average exercise price was $0 and $0 at
December 31, 1999 and 1998, respectively.
F-19
<PAGE>
No compensation expense was recognized as a result of the issuance of
stock options during the years ended December 31, 1999 and 1998.
STOCK OFFERINGS
On December 15, 1999, the Company commenced an offering (the "1999
Offering") of up to 7,885,714 shares of common stock at a price of
$1.75 per share. On March 7, 2000, the Company closed the 1999 Offering
upon the receipt of subscriptions for 4,000,000 shares. The 1999
Offering was conducted pursuant to Rule 506 of Regulation D under the
Securities Act of 1933 (the "Act"). Pursuant to the terms of the 1999
Offering, the proceeds are being held in escrow until confirmation of
the Plan of Reorganization. The Plan of Reorganization was approved on
June 28, 2000, and the Company received the funds on July 6, 2000. The
Company incurred cash offering costs of 10% of the gross proceeds of
the offering, or $700,000, which was subsequently converted into shares
of the Company's common stock at a rate of one share for $1.75 of
offering costs. In addition, the Company incurred offering costs of
120,000 shares of common stock valued at $210,000 and warrants to
purchase 400,000 shares of common stock valued at $0. The warrants
have an exercise price of $1.75, vest immediately, and expire in
March 2003.
NOTE 12 - INCOME TAXES
The following table presents the current and deferred income tax
provision for federal and state income taxes for the years ended
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
Current
Federal $ - $ -
State 800 800
--------------- ----------------
800 800
--------------- ----------------
Deferred
Federal - -
State - -
--------------- ----------------
- -
--------------- ----------------
PROVISION FOR INCOME TAXES $ 800 $ 800
=============== ================
</TABLE>
F-20
<PAGE>
The provision for (benefit from) income taxes differs from the amount
that would result from applying the federal statutory rate for the
years ended December 31, 1999 and 1998 as follows:
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
Statutory regular federal income tax rate 34.0% 34.0%
State taxes 5.8 5.8
Tax credits 2.4 2.4
Change in valuation allowance (42.2) (42.2)
------------ -------------
TOTAL - % - %
============= =============
</TABLE>
The tax effects of temporary differences which give rise to deferred
taxes at December 31, 1999 consisted of:
<TABLE>
<S> <C>
Deferred tax assets
Federal net operating loss carryforward $ 7,103,901
State operating loss carryforward 1,346,605
Capitalized research experimentation 2,072,754
Tax credits 783,111
Other (293,782)
----------------
Total gross deferred tax assets 11,012,589
Less valuation allowance 11,012,589
NET DEFERRED TAX ASSETS $ -
================
</TABLE>
As of December 31, 1999, the Company had net operating loss
carryforwards for federal and state income tax purposes of
approximately $20,890,000 and $15,230,000, respectively. The net
operating loss carryforwards begin expiring in 2010 and 2000,
respectively. The utilization of net operating loss carryforwards may
be limited due to the ownership change under the provisions of Internal
Revenue Code Section 382 and similar state provisions.
NOTE 13 - RELATED PARTY TRANSACTIONS
At December 31, 1999, $536,920 and $219,353 was owed to the Company's
Chief Executive Officer and Chief Technology Officer, respectively, for
deferred salaries and expenses they incurred on behalf of the Company.
These amounts are included in the Bankruptcy Liability as of December
31, 1999.
F-21
<PAGE>
NOTE 14 - YEAR 2000 ISSUE
The Company has completed a comprehensive review of its computer
systems to identify the systems that could be affected by ongoing Year
2000 problems. Upgrades to systems judged critical to business
operations have been successfully installed. To date, no significant
costs have been incurred in the Company's systems related to the Year
2000.
Based on the review of the computer systems, management believes all
action necessary to prevent significant additional problems has been
taken. While the Company has taken steps to communicate with outside
suppliers, it cannot guarantee that the suppliers have all taken the
necessary steps to prevent any service interruption that may affect the
Company.
NOTE 15 - SUBSEQUENT EVENTS
STOCK OFFERINGS
On March 27, 2000, the Company entered into an agreement to conduct
three additional offerings of common stock. These offerings are also
being conducted pursuant to Rule 506 of Regulation D under the Act. The
first offering was for 1,000,000 shares at $10 per share for a total of
$10,000,000. The second offering will follow completion of the first
and will be for total proceeds of up to $10,000,000. The third offering
will follow completion of the second and will be for total proceeds of
up to $5,000,000. The offering prices for the two additional offerings
will be set by the Company and the selling agents based upon market
conditions, but are required to be at least $10 per share. As of June
30, 2000, the Company has been informed by the selling agents that
subscriptions have been received for approximately $7,000,000 in the
first phase of the offering at $10 per share. The proceeds are being
held in escrow until a registration statement covering all the shares
in the offering has been declared effective by the Securities and
Exchange Commission ("SEC") within 180 days after confirmation of the
Plan of Reorganization.
The Company will incur a cash commission of 10% of the gross proceeds
of the offering to be paid in cash or shares of the Company's common
stock at the selling agent's option, a commission of 3% of the number
of shares sold in the offering to be paid in the form of shares of the
Company's common stock, and a commission of 10% of the number of shares
sold in the offering to be paid in the form of warrants to purchase
shares of the Company's common stock. The warrants have an exercise
price of $10, vest immediately, and expire three years from the date of
grant.
F-22
<PAGE>
On March 29, 2000, an offering of 500,000 shares of common stock to a
group of foreign investors (the "Regulation S Offering") at a price of
$8 per share was fully subscribed for gross proceeds of $4,000,000. The
funds are presently being held in escrow. Closing of the Regulation S
Offering is contingent upon the debtor's filing of a registration
statement with the SEC to permit the investors to sell their shares in
the public market and receipt of effectiveness of that statement from
the SEC within 180 days after confirmation of the Plan of
Reorganization. The Company incurred cash offering costs of 2% of the
gross proceeds of the offering, or $80,000, which can be converted into
shares of the Company's common stock at a rate of one share for $8 of
offering costs at the selling agent's option. In addition, the Company
incurred offering costs of 25,000 shares of common stock valued at
$200,000 and warrants to purchase 50,000 shares of common stock valued
at $0. The warrants have an exercise price of $8, vest immediately, and
expire in March 2003.
CONVERSION OF NOTES
In April 2000, two holders of convertible promissory notes in the
aggregate amount of approximately $190,000 converted their notes into
42,322 shares of common stock.
ACQUISITION
On March 27, 2000, the Company reached an agreement (the "Acquisition
Agreement"), subject to confirmation of the Plan of Reorganization and
certain other conditions, to purchase a controlling interest in eTraxx
Corporation ("eTraxx"). eTraxx is a start-up company founded in July
1998 by executives of the Company that will support a proprietary high
speed network for the delivery of digital content. The network is
currently in development. eTraxx has raised $600,000 in seed capital
and is conducting a $5,400,000 offering of its common stock. The
acquisition is contingent upon eTraxx's successful receipt of a minimum
of $1,000,000 in its offering, confirmation of the Plan of
Reorganization, and successful receipt by the Company of a minimum of
$1,000,000 in the new offering it is currently conducting.
In addition, eTraxx has agreed to loan the Company up to $500,000 and
the Company has received approval from the Bankruptcy Court to borrow
up to $400,000 of such amount. The loan bears interest at prime plus
1%. As of June 30, 2000, the Company has borrowed approximately
$200,000.
SYNERCOM
On July 10, 2000, certain assets purchased by Synercom were returned to
the Company in exchange for a payment of $160,000 by the Company and a
general release between Synercom, the Company, and its principals.
F-23
<PAGE>
NOTE 15 - SUBSEQUENT EVENTS (CONTINUED)
STOCK OPTION PLAN
On July 1, 2000, the Company amended its 1996 Stock Option Plan to
increase the number of stock options available to be granted under the
Plan to 3,500,000. The Company also granted 2,236,000 stock options
under the Plan to certain employees on that date. The options have an
exercise price of $1.75, vest over 12 to 24 months from the date of
grant, and expire between three and five years from the date of grant.
In addition, the Company granted 75,000 warrants and 20,000 warrants to
the Company's President and to an employee, respectively, as part of
their employment contracts. The President's warrants have an exercise
price of $1.75, vest immediately, and expire three years from the date
of grant. The employee's warrants have an exercise price of $1.75,
10,000 of the warrants vest immediately, and 5,000 warrants vest in
each of the next two years, and all the warrants expire three years
from the date of grant. No compensation expense was recorded for these
options and warrants as the exercise price was equal to the value of
the Company's common stock on the date of grant.
EMPLOYMENT AGREEMENTS
On July 1, 2000, the Company amended the employment agreements with its
Chief Executive Officer and its Chief Technology Officer, increasing
the total annual salary for these two officers to $950,000 for each of
the remaining two years of the officers' employment agreements. In
addition, the Company entered into three employment agreements with its
President and Chief Operating Officer, Senior Vice President, Investor
Relations, and Chief Administrative Officer for terms of two years.
Under the terms of these agreements, these officers will receive a
total annual salary of $800,000. These three officers were also to be
issued a total of 175,000 shares of common stock as a signing bonus
valued at $306,250.
CONTINGENT STOCK OPTIONS
On July 1, 2000, the Company granted stock options to its Chief
Executive Officer, Chief Technology Officer, and President that are
contingent upon the Company raising certain minimum total amounts of
funding through its 1999 and 2000 private placements. If the Company
raises gross proceeds of $25 million by December 31, 2000, each of the
three officers will be granted 100,000 stock options with an exercise
price of $1.75 that expire on December 31, 2003. If the Company raises
gross proceeds of $31 million by December 31, 2000, each of the three
officers will be granted 200,000 stock options with an exercise price
of $1.75 that also expire on December 31, 2003.
WARRANTS FOR SERVICES
During the three months ended September 30, 2000, the Company granted
388,214 warrants for legal and marketing services rendered valued at
$206,250.
F-24
<PAGE>
NOTE 15 - SUBSEQUENT EVENTS (CONTINUED)
WARRANTS FOR TECHNOLOGY
During the three months ended September 30, 2000, the Company issued
the Chief Executive Officer 1,000,000 warrants for the purchase of
certain technology valued at $35,000 and issued the Chief Technology
Officer 1,000,000 warrants for the purchase of certain technology
valued at $35,000. The value of the warrants was established at the
officers' personal basis in the technology.
NOTES RECEIVABLE - RELATED PARTIES
On July 13, 2000, the Company loaned $250,000 to a company owned by the
Company's President. The loan is due on or before January 31, 2001,
earns interest at the rate of 8% per annum, and is secured by 50,000
shares of the Company's common stock.
On July 10, 2000, the Company loaned $60,000 to an officer as an
advance against his compensation for the next year. Monthly payments of
$10,000 taken as deductions from the officer's salary are due on the
loan starting on August 10, 2000, with any remaining principal and
interest due on or before January 10, 2001. The loan bears interest at
the rate of 10% per annum and is unsecured.
F-25
