<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
Commission file number: 0-21864
TELEGEN CORPORATION
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(Exact name of registrant as specified in its charter)
CALIFORNIA 84-0672714
-------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1840 Gateway Drive, Suite 200
San Mateo, California 94404
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(650) 261-9400
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such requirements for
the past 90 days.
YES /X/ NO / /
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES /X/ NO / /
The number of issued and outstanding shares of the Registrant's Common Stock as
of September 30, 2000, was 5,606,446.
Telegen Corporation
Quarterly Report on Form 10-QSB
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Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS........................................ 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION................ 12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................... 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS................... 18
ITEM 5. OTHER INFORMATION........................................... 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 20
SIGNATURES
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
(Unaudited)
September 30,
2000
-------------
ASSETS
<S> <C>
Current assets:
Cash ....................................................... $ 3,935,930
Note receivable - employee ................................. 55,961
Note receivable - related party ............................ 250,000
Deferred offering costs .................................... 8,333
-------------
Total current assets ................................... 4,250,224
Property and equipment, net ..................................... 309,697
Other assets .................................................... 58,856
-------------
Total assets ........................................... $ 4,618,777
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bankruptcy liability ....................................... $ 1,994,041
Post petition liability .................................... 974,592
Convertible notes payable .................................. 600,000
Note payable - affiliate ................................... 200,000
Note payable - shareholder ................................. 13,100
-------------
Total current liabilities .............................. 3,781,733
-------------
Contingencies
Shareholders' equity
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
5,606,446 shares issued and outstanding ................ 31,764,709
Accumulated deficit ........................................ (30,927,665)
-------------
Total shareholders' equity ........................ 837,044
-------------
Total liabilities and shareholders' equity .... $ 4,618,777
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the Three and Nine Months Ended September 30,
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Operating expenses
Research and development ................... $ 126,882 $ -- $ 271,147 $ 10,180
General and administrative ............... 2,314,851 249,229 3,114,342 754,420
------------- ------------- ------------- -------------
Total operating expenses ............. 2,441,733 249,229 3,385,489 764,600
------------- ------------- ------------- -------------
Loss from operations .......................... (2,441,733) (249,229) (3,385,489) (764,600)
------------- ------------- ------------- -------------
Other income (expense)
Interest income .......................... 141,802 -- 298,698 --
Interest expense ......................... (20,000) -- (50,000) --
Other income ............................. -- 11,714 -- 18,111
------------- ------------- ------------- -------------
Total other income (expense) ......... 121,802 11,714 248,698 18,111
------------- ------------- ------------- -------------
Net loss ............................. $ (2,319,931) $ (237,515) $ (3,136,791) $ (746,489)
============= ============= ============= =============
Basic and diluted loss per share attributable
to common Shareholders ................... $ (0.45) $ (0.25) $ (1.32) $ (0.79)
============= ============= ============= =============
Weighted-average common shares outstanding .... 5,170,704 950,360 2,368,902 948,650
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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TELEGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Nine Months Ended September 30,
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
----------------------------
2000 1999
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................. $(3,136,791) $ (746,489)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization ............... 87,277 119,789
Amortization of deferred financing costs .... 37,500 --
Stock issued for employee services .......... 332,500 --
Warrants issued for service rendered ........ 206,250 --
(Increase) decrease in
Other assets ..................................... (55,856) --
Increase (decrease) in
Accrued payroll .................................. 231,504 399,712
Accrued expenses ................................. 383,490 133,291
Bankruptcy liability ............................. (1,320,586) --
----------- -----------
Net cash used in operating activities ...... (3,234,712) (93,697)
----------- -----------
Cash flows from investing activities
Note receivable - employee ........................... (55,961) --
Note receivable - related party ...................... (250,000) --
Purchase of property and equipment ................... (52,796) --
----------- -----------
Net cash provided by investing activities... (358,757) --
----------- -----------
Cash flows from financing activities
Proceeds from convertible notes payable .............. -- 105,000
Proceeds from notes payable - shareholder ............ -- 13,100
Proceeds from note payable - affiliate ............... 200,000 --
Proceeds from common stock ........................... 7,020,040 --
----------- -----------
Net cash provided by financing activities... 7,220,040 118,100
----------- -----------
Net increase (decrease) in cash ............ $ 3,626,571 $ 24,403
Cash, beginning of period ................................. 309,359 14
----------- -----------
Cash, end of period ....................................... $ 3,935,930 $ 24,417
=========== ===========
Supplemental disclosures of cash flow information
Income taxes paid ......................................... $ 8,686 $ --
=========== ===========
</TABLE>
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SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the nine months ended September 30, 1999, the Company completed the
following:
- Issued 20,000 shares of common stock as payment for legal services
rendered valued at $28,000.
- 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.
- Issued 138,950 shares of common stock as payment for the Bankruptcy
Liability valued at $243,163.
- Issued 295,685 shares of common stock as payment for post petition
accrued expenses valued at $413,959.
During the nine months ended September 30, 1999, the Company completed the
following:
- Issued 9,530 shares of common stock for the conversion of $15,000 of
notes payable.
The accompanying notes are an integral part of these financial statements.
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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 referred to as the
"Company").
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 Northern 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 "Effective Date"). The Plan of Reorganization also
affects the debtor's subsidiaries, Telegen Communications Corporation,
and Telegen Display Laboratories, Inc. All options and warrants
outstanding prior to the Effective Date 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 September 30, 2000, the bankruptcy liability was comprised of the
following:
<TABLE>
<S> <C>
Accounts payable to unsecured creditors $ 1,994,041
---------------
Total $ 1,994,041
===============
</TABLE>
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NOTE 3 - 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 September 30, 2000, the Company has borrowed approximately
$200,000.
NOTE 4 - ACQUISITION OF ASSETS
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.
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.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles for interim financial
information and with Regulation S-B. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all normal, recurring adjustments considered necessary
for a fair presentation have been included. The financial statements
should be read in conjunction with the audited financial statements and
notes thereto included in the Company's Annual Report on Form 10-KSB,
as amended, for the year ended December 31, 1999. The results of
operations for the nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 2000.
GOING CONCERN
The Company has received a report from its independent auditors that
includes an explanatory paragraph describing the uncertainty as to the
Company's ability to continue as a going concern. These consolidated
financial statements contemplate the ability to continue as such and do
not include any adjustments that might result from this uncertainty.
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NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2000 consisted of the
following:
<TABLE>
<S> <C>
Automobile $ 9,100
Machinery and equipment 585,938
Furniture and fixtures 547,817
Purchased technology 70,000
Capital lease obligations 16,611
----------------
1,229,466
Less accumulated depreciation and amortization 919,769
----------------
Total $ 309,697
================
</TABLE>
NOTE 7 - POST PETITION LIABILITY
Post petition liability at September 30, 2000 consisted of the
following:
<TABLE>
<S> <C>
Accrued payroll $ 841,406
Accrued expenses 133,186
----------------
Total $ 974,592
================
</TABLE>
NOTE 8 - CONTINGENCIES
LITIGATION
Prior to the Filing Date, 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. All
such amounts were subsequently paid pursuant to the Plan.
On July 26, 2000, Display Research Laboratories, Inc. ("DRL"), W.
Edward Naugler, Jr., and David Guo (collectively the "Plaintiffs")
filed an action (the "Complaint") in San Mateo County Superior
Court, California, (the "State Action") against the Company and
Jessica L. Stevens, the Company's Chief Executive Officer.
Plaintiffs seek a declaratory judgment from the Superior Court that
Plaintiffs are not in violation of any patents or intellectual
property rights owned by the Company relating to the HGED flat panel
display technology. Plaintiffs also allege that the Company and Ms.
Stevens abused the bankruptcy rules by seeking examination of
Plaintiffs through the 2004 process. Mr. Naugler and Mr. Guo were
formerly officers of the Company's subsidiary Telegen Display
Laboratories, Inc.
In August 2000, the Company and Ms. Stevens removed the State Action
to the United States Bankruptcy Court, Northern District of
California (the "Bankruptcy Action"). On September 22, 2000, the
Company filed counterclaims (the "Counterclaims") against Plaintiffs
and a Third Party Complaint against a former attorney of the
Company, alleging: correction of inventorship; declaratory judgment
of inventorship; unjust enrichment; constructive trust; false
description under 15 USC 1125 (a); breach of contract;
misappropriation of trade secrets; breach of fiduciary duty; and
declaratory judgment of patent ownership. On November 16, 2000, the
Complaint, Counterclaims and Third Party Complaint were removed from
the Bankruptcy Court to the Federal District Court for the Northern
District of California (the "Federal Action"). The cause of action
in Plaintiff's Complaint alleging abuse of process against the
Company and Ms. Stevens was subsequently dismissed without
prejudice. On December 4, 2000, the Company dismissed the Third
Party Complaint, without prejudice, against the former attorney.
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.
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NOTE 9 - SHAREHOLDERS' EQUITY
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
Securities Act of 1933. 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 September 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.
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 Company's filing of a registration
statement with the SEC to permit the investors to sell their shares in
the public market and effectiveness of the registration 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.
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 VP, 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.
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NOTE 9 - SHAREHOLDERS' EQUITY (Continued)
In addition, pursuant to an employment agreement with an employee, the
Company issued 15,000 shares of common stock as a signing bonus valued
at $26,250.
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 quarter ended September 30, 2000, the Company granted
388,214 warrants for legal and marketing services rendered valued at
$206,250. The warrants have an exercise price of $1.75, vest
immediately and expire three years from the date of grant.
COMMON STOCK FOR SERVICES
During the quarter ended September 30, 2000, the Company issued 20,000
shares of common stock as payment for legal services rendered valued at
$28,000.
NOTE 10 - RELATED PARTY TRANSACTIONS
During the quarter 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.
At September 30, 2000, $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 September
30, 2000.
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 earns interest at
the rate of 10% per annum and is unsecured.
NOTE 11 - SUBSEQUENT EVENTS
Subsequent to September 30, 2000, the Company issued 14,800 shares of
common stock as payment for legal services rendered valued at $20,720.
Subsequent to September 30, 2000, the Company met all the conditions
necessary to acquire a controlling interest in eTraxx and issued
5,575,000 shares of common stock to complete the transaction.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934. THESE FORWARD LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET FORTH UNDER "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"), then a subsidiary of the Company. In 1997, revenues
were derived from the operations of MSM and TCC, a subsidiary of the Company. In
1998, revenues were derived from the operations of TCC. In 1999, Telegen had no
operating revenues. During the third quarter of 2000, Telegen had no operating
revenues.
Telegen has incurred significant operating losses in every fiscal year since
its inception, and, as of September 30, 2000, had an accumulated deficit of
$30,678,112. As of September 30, 2000, Telegen had working capital of
$468,491. Telegen expects to continue to incur substantial operating losses
through the last quarter of 2000. In order to become profitable, Telegen must
successfully refinance its operations, develop commercial products, manage
its operating expenses, establish manufacturing capabilities, create a
distribution capability and produce and sell its products.
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.
REVENUES. Revenues for the third quarter of 2000 were $0 compared to $0 for the
third quarter of 1999. Telegen filed for reorganization under Chapter 11 of the
U. S. Bankruptcy Code on October 28, 1998 and, due to unavailability of cash
resources, the Company suspended all sales ands marketing activities during the
pendency of its reorganization. On June 7, 2000, the Company filed a Plan of
Reorganization which was confirmed by the Bankruptcy Court on June 28, 2000.
COST OF GOODS SOLD. Cost of goods sold and contract services were $0 for the
third quarter of 2000 compared to $0 for the third quarter of 1999. Telegen
filed for reorganization under Chapter 11 of the U. S. Bankruptcy Code on
October 28, 1998 and, due to unavailability of cash resources, the Company
suspended all sales and marketing activities during the pendency of its
reorganization. On June 7, 2000, the Company filed a Plan of Reorganization
which was confirmed by the Bankruptcy Court on June 28, 2000.
RESEARCH AND DEVELOPMENT. Research and development expenses were $126,882 for
the third quarter of 2000 compared to $0 for the third quarter of 1999.
Increased research and development expenses for the third quarter of 2000
resulted from increased availability of funds and continuing start up of flat
panel research efforts; all of the research and development for the third
quarter of 2000 was attributable to Telegen. Telegen filed for reorganization
under Chapter 11 of the U. S. Bankruptcy Code on October 28, 1998 and, due to
unavailability of cash resources, the Company suspended all research and
development activities during the third quarter of 1999. On June 7, 2000, the
Company filed a Plan of Reorganization which was confirmed by the Bankruptcy
Court on June 28, 2000.
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<PAGE>
SALES AND MARKETING. Sales and marketing expenses were $0 for the third quarter
of 2000 compared to $0 for the third quarter of 1999. Telegen filed for
reorganization under Chapter 11 of the U. S. Bankruptcy Code on October 28, 1998
and, due to unavailability of cash resources, the Company suspended all sales
and marketing activities during the pendency of its reorganization. On June 7,
2000, the Company filed a Plan of Reorganization which was confirmed by the
Bankruptcy Court on June 28, 2000.
GENERAL AND ADMINISTRATIVE. General and Administrative expenses were
$2,314,851 for the third quarter of 2000 compared to $249,229 for the third
quarter of 1999. All of the general and administrative expenses for the third
quarters of 1999 and 2000 were attributable to Telegen. The increase in the
third quarter of 2000 was related to increased availability of funds and
completion of Telegen's reorganization. The primary components of general and
administrative expenses for the third quarter of 2000 were cash payments of
allowed claims under the Plan of Reorganization confirmed on June 28, 2000,
increased staffing and increased corporate activities. The primary components
of general and administrative expenses for the third quarter of 1999 were
employee salaries and legal expenses relating to Telegen's reorganization.
INTEREST INCOME AND EXPENSE. Net interest income for the third quarter of
2000 was $121,802 as compared with interest income/expense of $0 for the
third quarter of 1999. Of the third quarter interest income and expense,
$141,802 was interest income and $20,000 was interest expense. All of the net
interest income for the third quarter of 2000 was attributable to Telegen.
The increase in net interest income for the third quarter of 2000 resulted
from increased interest bearing accounts less financing charges related to
$100,000 and $500,000 Convertible Note financings completed in April 1999 and
December 1999, respectively, and the $200,000 borrowing from eTraxx during
the quarter.
LIQUIDITY AND CAPITAL RESOURCES
Telegen has funded its operations primarily through private placements of its
equity securities with individual and institutional investors. As of September
30, 2000, Telegen had raised $26,502,577 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 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. 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.
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
released to the Company on July 7, 2000.
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 Securities Act of 1933. 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
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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 effectiveness of
the registration statement 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.
Telegen issued 20,000 shares of common stock and 0 shares of common stock during
the third quarter of 2000 and 1999, respectively, in lieu of cash as payment for
legal services rendered valued at $28,000.
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. Telegen anticipates that its existing capital
resources, including expected future funding of its Regulation S and 2000
Offerings, if they materialize, and revenues from operations will be adequate to
meet Telegen's cash requirements through 2001. Although Telegen believes it will
obtain additional funding in the first quarter of 2001, 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. 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 in 2001, 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
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parties having substantial resources to conclude such capital formation. Such
capital formation efforts are intended to infuse up to $35 million in 2000
and 2001, including $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 through 2000 and 2001. 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
The forward-looking statements and other information in this report are subject
to certain risks and uncertainties that could cause actual results to differ
materially from historical results or anticipated results. In addition to the
other information in this Report on Form 10-QSB, the following risk factors
should be considered carefully in evaluating the Company and its business:
DEVELOPMENT STAGE COMPANY WITH NO REVENUES
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
September 30, 1999 is $30,678,112. The Company will continue to incur operating
losses through 2000. In order to become profitable, the Company must
successfully 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 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 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
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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 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
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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., 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 26, 2000, Display Research Laboratories, Inc. ("DRL"), W. Edward
Naugler, Jr., and David Guo (collectively the "Plaintiffs") filed an action (the
"Complaint") in San Mateo County Superior Court, California, (the "State
Action") against the Company and Jessica L. Stevens, the Company's Chief
Executive Officer. Plaintiffs seek a declaratory judgment from the Superior
Court that Plaintiffs are not in violation of any patents or intellectual
property rights owned by the Company relating to the HGED flat panel display
technology. Plaintiffs also allege that the Company and Ms. Stevens abused the
bankruptcy rules by seeking examination of Plaintiffs through the 2004 process.
Mr. Naugler and Mr. Guo were formerly officers of the Company's subsidiary
Telegen Display Laboratories, Inc.
In August 2000, the Company and Ms. Stevens removed the State Action to the
United States Bankruptcy Court, Northern District of California (the "Bankruptcy
Action"). On September 22, 2000, the Company filed counterclaims (the
"Counterclaims") against Plaintiffs and a Third Party Complaint against a former
attorney of the Company, alleging: correction of inventorship; declaratory
judgment of inventorship; unjust enrichment; constructive trust; false
description under 15 USC 1125 (a); breach of contract; misappropriation of trade
secrets; breach of fiduciary duty; and declaratory judgment of patent ownership.
On November 16, 2000, the Complaint, Counterclaims and Third Party Complaint
were removed from the Bankruptcy Court to the Federal District Court for the
Northern District of California (the "Federal Action"). The cause of action in
Plaintiff's Complaint alleging abuse of process against the Company and Ms.
Stevens was subsequently dismissed without prejudice. On December 4, 2000, the
Company dismissed the Third Party Complaint, without prejudice, against the
former attorney.
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The Company believes that the Complaint is without merit and intends to
defend the matter vigorously. The Company also believes it has a good faith
basis to proceed forward in its Counterclaims against DRL and the above named
individuals, seeking recovery of its misappropriated intellectual property,
money damages or other relief available through the Federal Court. To the
extent the Plaintiffs were to succeed in this matter, the Company's results
of operation and financial condition would not be materially adversely
affected.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On December 15, 1999, the Company commenced an offering (the "1999 Offering") of
up to 7,885,714 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
completed 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
released to the Company on July 7, 2000. Upon the effectiveness of the Company's
Plan of Reorganization on June 30, 2000, the existing common stock of the
Company was exchanged for the New Common Stock in a ratio of 16 existing shares
of common stock for one share of New Common Stock.
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 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 (the "Act"), and was conducted in reliance upon the exemption from
registration afforded by Rule 506 of Regulation D under such Act. All of the
purchasers 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 March 27, 2000, the Company commenced 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. On March 29, 2000, the Company completed the Regulation S
Offering upon the receipt of subscriptions for 500,000 shares of New Common
Stock and gross proceeds of $4,000,000. The Regulation S Offering was not
registered under the Act and was conducted in reliance upon the exemption from
registration afforded by Regulation S under such Act. All of the purchasers in
the Regulation S Offering were non-U.S. Persons as defined in Rule 903 of
Regulation S. The proceeds of the Regulation S Offering are currently held in
escrow and will be released to the Company after (i) confirmation of the Plan of
Reorganization, which occurred on June 28, 2000, and (ii) a registration
statement covering all of the shares sold in the Regulation S Offering has been
declared effective by the SEC within 180 days after Plan confirmation.
In connection with the Regulation S Offering, upon closing the Selling Agents
will receive (1) a cash commission of two percent (2%) of the gross proceeds in
cash or New Common Stock priced at $8.00 per share, at the Selling Agents'
option, (2) 25,000 shares of New Common Stock and (3) a warrant to purchase
50,000 of shares of New Common Stock 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.
On March 27, 2000, the Company commenced an offering (the "2000 Offering") of
New Common Stock of the Company. The 2000 Offering is also being conducted
pursuant to Rule 506 of Regulation D under the Act. The 2000 Offering is an
offering of up to 1,000,000 shares of New Common Stock at $10 per share for
total gross proceeds of up to $10,000,000. On September 30, 2000 the Company
completed the 2000 Offering upon the receipt of subscriptions for 750,000 shares
of New Common Stock and gross proceeds of $7,500,000. The proceeds of the 2000
Offering are currently held in escrow and will be released to the Company after
(i) confirmation of the Plan of Reorganization, which occurred on June 28,
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2000, and (ii) a registration statement covering all of the shares sold in
the 2000 Offering has been declared effective by the SEC within 180 days
after Plan confirmation.
In connection with the 2000 Offering, the Selling Agents will receive (1) a cash
commission of ten percent (10%) of the gross proceeds in cash or New Common
Stock priced at the offering price, at the Selling Agents' option, (2) a three
percent (3%) commission payable in New Common Stock priced at the offering price
and (3) a warrant to purchase, at the offering prices, a number of shares of New
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 Offering has not closed and no commissions have been paid to the Selling
Agents.
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.
ITEM 5. OTHER INFORMATION
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.
In addition, pursuant to an employment agreement with an employee, the Company
issued 15,000 shares of common stock as a signing bonus valued at $26,250.
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.
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 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
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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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
2.4* Agreement and Plan of Reorganization among the Registrant,
eTraxx Corporation and the eTraxx Shareholders.
Certain exhibits to the Agreement and Plan of Reorganization
have been omitted. Registrant hereby agrees to furnish them
supplementally to the Securities and Exchange Commission upon
request.
2.5* eTraxx Shareholder Waiver and Amendment to Agreement and Plan
of Reorganization.
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]
3.4** Bylaws of Telegen Corporation
3.5*** Certificate of Amendment of Bylaws effective August 6, 1997
3.6**** Amended and Restated Articles of Incorporation dated June 30,
2000
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
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<PAGE>
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
11.1++ Statement Re Computation of Per Share Earnings
27.1 Financial Data Schedule
---------------------------------------
* Incorporated by reference herein to the Form 8-K filed by the Registrant on
December 8, 2000
** Incorporated by reference herein to the Registrant's Quarterly Report on
Form 10-QSB, as filed with the Commission on November 12, 1996.
*** Incorporated by reference herein to the Form 10-K filed by the Registrant
on April 15, 1998
**** Incorporated by reference herein to the Form 8-K filed by the Registrant
on December 20, 2000
+ Incorporated by reference herein to the Form 10-KSB filed by the Registrant
on December 8, 2000
++ Incorporated by reference to the Consolidated Statements of Operations and
Comprehensive Income Statement and the accompanying footnotes to the
financial statements herein
(b) Reports of Form 8-K
The Registrant filed no Current Reports on Form 8-K during the quarter ended
September 30, 2000.
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<PAGE>
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 20, 2000 By: /s/ JESSICA L. STEVENS
----------------------------
Jessica L. Stevens
Chief Executive Officer
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